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A Housing Bill that Doesn't Whack Low-Income Renters
If you would like to help the millions of low and moderate-income homeowners who are facing the loss of their homes, but don't want to bail out the banks or take money out of the pockets of low-income renters, there is now a bill for you.
Representative Raul Grijalva (D-AZ) introduced the Saving Family Homes Act last week. This bill would give families facing foreclosure the option to stay in their homes up to 20 years as renters paying the fair market rent. This is a variation of my own-to-rent proposal from last summer.
The smart money doesn't think this bill much chance of passing, but of course the smart money also bet on subprime mortgages and Internet stocks. We shall see.
--Dean Baker
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The rent would be set by a court-appointed appraiser
This builds in a litigable issue of fact which (in some due process obsessed jurisdictions) could lead to jury trials. (Which employ, save us Jesus, trial lawyers
Other than that quibble, however, its a decent idea, and if anything, the extra costs implied by the procedural hurdles would enhance the impact of the existence of this alternative upon the universe of discourse in which the foreclosing lender negotiates with the home owner.
May 25, 2008 3:37 PM | Reply | Permalink
I can't believe I got here before Ellen.
May 25, 2008 3:40 PM | Reply | Permalink
I don't think so; States appraise property values all the time so they know how much tax owners owe. Ostensibly, the appraiser wouldn't really set the rent so much as establish the value of the house, which would be plugged into a rent calculation developed by HUD or the relevant state agency (but I suspect it would end up being HUD). Allowing individual court-appointed appraisers to set rents willy-nilly is insane and the courts would likely insist on an objective, reasoned standard.
The bigger problem with this statute (as opposed to mortgage buying) is that could still kick the owners-cum-renters out if they can't pay the fair market value for rent, especially if it's significantly higher than what the homeowners had thought their mortgage payments would be. That is, a fair rent may be significantly more than some folks could afford (since the realtors promised crazy low mortgage rates beneath the average rental price per month).
Furthermore, the the proposal is too broad; it seems to presume that anyone whose mortgage sold for less than the metropolitan median value and is in danger of foreclosure is the victim of a subprime loan. Banks and other lenders who did not drink the subprime and real-estate values Kool-Aid (along with those who did) would be encouraged to deny even more home loans to folks buying below-median homes, since any such loan that results in foreclosure for any reason may transform a mortgagee into a tenant, destroying interest returns on the original loan. The statute may end up hurting (or simply fail to help) more low-income folks overall than it helps.
I mean, I'm all for sticking it to irresponsible lenders, but I'd be more in favor of government buyouts of foreclosed properties and the rent going to the state, which could turn around and sell the property once the renters leave on their own. The government would have to suck it up a little and pay an objectively fair foreclosure price; this would mean that lenders wouldn't lose so much that they'd grow more cautious about lending for below-median purchases, rather, they could not turn around and bamboozle a new buyer with crazy lending terms a la the current crisis.
May 26, 2008 3:06 AM | Reply | Permalink
Nice sentiments but why not try Alan Blinder's simpler suggestion to reinstitute the Home Owner's Loan Corporation. Excerpts via Mark Thoma:
"During the Depression, President Franklin D. Roosevelt and Congress dealt with huge impending foreclosures by creating the Home Owners’ Loan Corporation. Now, a small but growing group of academics and public figures ... is calling for the federal government to bring back something like the HOLC.
"The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks ... and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury.
"The scale of the operation was impressive. Within two years, the HOLC received about 1.9 million applications ... and granted just over a million new mortgages. (Adjusting only for population growth, the corresponding mortgage figure today would be almost 2.5 million.) Nearly one of every five mortgages in America became owned by the HOLC. Its total lending over its lifetime amounted to $3.5 billion — a colossal sum equal to 5 percent of a year’s gross domestic product at the time. (The corresponding figure today would be about $750 billion.)
"As a public corporation chartered for a public purpose, the HOLC was a patient and even lenient lender. It tried to keep delinquent borrowers on track with debt counseling... But times were tough in the 1930s, and nearly 20 percent of the HOLC’s borrowers defaulted anyway. So the corporation eventually acquired ownership of about 200,000 houses, nearly all of which were sold by 1944. The HOLC closed its books in 1951, or 15 years after its last 1936 mortgage was paid off, with a small profit. It was a heavy lift, but the incredible HOLC lifted it.
"Today’s lift would be far lighter. And a good thing, too, because our government is far more timid and divided than Roosevelt’s. ..."
It worked once before. Why not try it again?
May 25, 2008 3:56 PM | Reply | Permalink
Today’s lift would be far lighter
True, in the aggregate, and as regards total public risk undertaken.
But (disclaimer:numbers emerging from ass) I believe that the impact of the housing bubble (in contrast to the events prior to the depression) has so inflated the prices of the specific properties at issue, that there is no way for mortgage guarantee (at the existing indebtedness which reflected a drastic overvaluation of the property when the note was written) to be anything but a real estate price support program.
That would be a social decision a democratic people might make, but it has serious equity consequences for the non home owners, who really ought to get some other bone in return (let make rent tax deductible, hell, lets give a 1000 dollar a month renters refundable credit).
May 25, 2008 4:26 PM | Reply | Permalink
I did not get the impression that HOLC was a mortgage guarantee program but rather that they bought mortgages from banks (the only mortgagors of the time), hopefully at a deep discount, then held them until paid in full or not. In the case of defaults, homes were resold. In other words, the government went into the mortgage business.
Sure such an agency could be abused but can't they all. Staffing HOLC would be more difficult today -- too many operators on one side and too many bleeding hearts on the other.
May 25, 2008 4:44 PM | Reply | Permalink
bought mortgages from banks
If at face value, the net effect (via foregone "price clearing" as a ramification of the foreclosure process) is to artificially support the price of houses.
I'm not necessarily against this, as an economic intervention. It's just that to be fair renters (who would, moreover, foot most of the bill) should get some sort of tax forebearance to neutralize the tax preferences owners already get, plus the additional tax expenditures implied by the mortgate purchases.
May 25, 2008 4:55 PM | Reply | Permalink
Why not go the other direction and eliminate the mortgage interest tax deduction on these loans which would presumably be a bit more lenient than private lenders?
May 25, 2008 5:21 PM | Reply | Permalink
Dean, last time I brought up my "it's no fair turning owners into tenants argument" you said that the banks won't want to be landlords and so they'll renegotiate the loan terms rather than let that happen.
But if that's true, why the charade? Why doesn't the government just force them to reset the loan terms so that people can remain owners?
I fear that the banks will find it easy to go ahead and become landlords. Landlording isn't a bad business. I'm sure Wachovia could find a way to make money at it.
May 25, 2008 7:32 PM | Reply | Permalink
How solve the U.S. economic problems: 1) create 'middle class' jobs (& stop the outsourcing) you dummies in the govt. 2) create more jobs (& stop the outsourcing) by reining in and restructuring the tax code that favor big business you morons in the govt. 3) create more jobs through better regulations from main street to Wall Street by impeaching all of those greedy boneheads in Congress. By the way, we're still waiting for Cindy McCain to release ALL of her tax returns including ALL schedules, ALL asset holdings, and ALL income earnings, including itemization of ALL of the Bush Tax Breaks.
May 25, 2008 10:11 PM | Reply | Permalink
Re: If at face value, the net effect (via foregone "price clearing" as a ramification of the foreclosure process) is to artificially support the price of houses.
The support would, at most, provide for a gradual deflation of housing prices since a flood of priced-for-fire-sale foreclosures would be averted. Prices would still drift downward since buyers these days are not be willing to pay inflated prices, and lenders now balk at making loans for excessively priced homes. People who needed to sell for any reason would still have to lower their prices, though not in a mad scramble; for the bottom that a foreclosure flood would unleash. The rental plan being touted here would have much the same effect.
Re: Why doesn't the government just force them to reset the loan terms so that people can remain owners?
Indeed. Pending legislation to force mortgage writedowns in bankruptcies would have much the same effect-- even though not every distressed homeowner would file, the simple threat to do so would serve as an incentive for mortgagees to be cooperative.
May 25, 2008 11:07 PM | Reply | Permalink
Destor23,
this is not a zero/one proposition. The change in the foreclosure rules gives lenders a very strong incentive to negotiate new terms. However, it will not lead in every case to people staying in their houses as owners.
The big advantage of this plan, as opposed to the government dictating new terms, is that the government doesn't have to decide for each homeowners what the terms should be. It has just changed the rules in a way that gives a very powerful club to the homeowner. With this club in hand, the homeowner should be able to negotiate a deal that is far more advantageous.
Economists (people like Alan Blinder) generally favor market based solutions like this where you set rules and then let the actors work things out for themselves. Admittedly, this plan is less friendly to the banks than the Blinder proposal, but helping the banks was not a major concern for me.
May 26, 2008 9:31 AM | Reply | Permalink
You always say this plan is "less friendly to the banks" but I don't see it.
What's to stop Wachovia from opening a highly profitable rental unit, based on this plan?
This proposal gives the banks a huge opportunity, if you think about it. Somebody who was paying a mortgage to earn equity is now paying rent to the bank. For the bank that's pure income and the former owner gets nothing. Then, after 20 years, the bank has an appreciated asset that it can sell. How is that hard on the banks?
We can stop foreclosures by governmental decree. That sticks it to the banks.
May 26, 2008 9:47 AM | Reply | Permalink
Well, for one thing, banks don't like being real-estate managers. They prefer managing money. Why do you think they're selling - or trying to sell - all those foreclosed housed?
May 26, 2008 2:14 PM | Reply | Permalink
What do you mean? Banks do a lot more than just "managing money."
Banks are in private equity, for example. Yes, that's part of money management, but it's also part of company management.
Banks are also in Real Estate Investment Trusts which is, again, money management but also property management.
Any bank that can assemble and make money off of a REIT can easily think of ways to monetize being a landlord. They've already done it. Dean's thinks he's punishing them when he's really just handing them a new profit center at the expense of people who bought bad loans.
May 26, 2008 6:49 PM | Reply | Permalink
They might not like being landlords as much as you think--remember that as landlords they can wake up tomorrow and discover that a progressive municipality (in the right state) has instituted rent control, just cause eviction, and who knows what else?
Suddenly, their "market rent" is a controlled rent--or is it? Maybe the Federal Bank Rescue and Bailout Act will specifically pre empt local impediments to maximum profit.
In any case, there are more transaction costs to landlording than there are to bundling mortgages and singing out "later days, amigos, we're off into the sunset."
May 27, 2008 3:22 AM | Reply | Permalink
Sure, there are more transaction costs to landlording.
But... if that's enough to keep banks out of the business, then why do banks run so many REIT funds?
I'm not saying that the banks would go out and choose this. Only that they'd easily exploit it if it were forced upon them. They'd certainly prefer Baker's plan to mine because I'd just force them to rewrite the mortgages.
May 27, 2008 9:18 AM | Reply | Permalink
This proposal gives the banks a huge opportunity, if you think about it. Somebody who was paying a mortgage to earn equity is now paying rent to the bank. For the bank that's pure income and the former owner gets nothing.
How many of these homeowners were actually earning equity? A lot of these people probably had "interest-only mortgages" so that they were not buildoing up equity in the first place. For people whose homes are now worth less than what the mortgage is, having no equity represents an increase in equity compared to the negative equity that they have now.
May 26, 2008 9:39 PM | Reply | Permalink
If they weren't earning equity it's only because they were sold bad loans. Remember, when these things were sold, the borrowers were basically told they'd no doubt be able to refinance before the interest rate went up -- so that they'd be able to start earning equity later. The Refi opportunity dried up. So... the banks basically lied. So why not just force them to refi so that people can earn equity?
May 27, 2008 9:16 AM | Reply | Permalink
If you would like to help the millions of low and moderate-income homeowners who are facing the loss of their homes . . . . Dean Baker
If they were "their" homes, they wouldn't be facing foreclosure. Ownership implies equity. Where there is no equity, there is no ownership.
The real problem for so many low and lower middle income "home owners" is that they live in overbuilt cities (Cleveland, Detroit, etc.) where owning a home has been a bad investment for years.
Katrina solved New Orleans' problem; perhaps, the subprime "crisis" will solve these, as well.
May 26, 2008 2:26 PM | Reply | Permalink
perhaps, the subprime "crisis" will solve these, as well.
I think not, at least in the immediate future--you appear to be referencing the business model of my cousin *Marvin, and he is still the same shiftless good for nothing living on my aunt's couch. If there were anything like demand, he'd be out and about every night for at least four hours, and I have not seen even one small bottle collection suitable for heavable "cocktail" improvisation.
Other than this means of "clearing" the market, I'm not sure the sub prime crisis will diminish the existing housing stock, beyond the decay of unoccupied dwellings, which is way too slow.
*Marvin The Torch--Urban renewal in a FLASH!
May 27, 2008 3:15 AM | Reply | Permalink
:-)
May 27, 2008 5:01 AM | Reply | Permalink
May 27, 2008 8:21 AM | Reply | Permalink
Hi Dean,
We have discussed the merits of your "Own-to-Rent" plan vs. our SwapRent (SM) based solution since August 29th, 2007. I have also sent you many updates along the way. Could you and your blog readers take a look at the FAQ#12 on our web site at http://www.SwapRent.com on my response to the new bill by Raul Grijalva and share with me your response? It is near the bottom of the home page.
The good intention of such an "Own-to-Rent" plan to help many homeowners be able to stay in their own homes may seem to be laudable. The spouse and kids may have emotional attachment to a place where they grew up or lived for a long time. This is exactly one major part of the many advantages that the SwapRent (SM) based solution could deliver, i.e. the social good to help homeowners continue to stay at their own homes. However, that is where the similarity ends.
The "Own-to-Rent" plan will not be able to deliver any of the other major advantages of SwapRent (SM) in terms of the ability to help solve our current economic crisis. In your plan the mortgages will continue to default, written down on the book by the lending banks and the properties will continue to be foreclosed, and hence the investors losses and the banking credit crunch continue ...
Furthermore, banks will be further burdened by this new legislation to ask them to move away from their core business to manage properties all day long. When they go belly up it will be the government using yours and my tax dollars to be the landlord to millions of these homeowners. If they get away with the current problems, the next thing they will ask then maybe "rent control".
It seems your plan really prepares us to move towards a socialist central planning state very well ...
May 27, 2008 11:18 AM | Reply | Permalink