Evidence of Intelligent Life at Fannie/Freddie
Amazing, but true; Fannie Mae and Freddie Mac have both announced that they are going to allow homeowners who have been foreclosed to remain in their homes as renters. Apparently they have finally overcome the cult of homeownership to do something to help people who used to homeowners.
It would be great if other lenders followed the lead of Fannie and Freddie. It would be even better if they provided real security of tenure; say the right to remain in the home for 5-10 years, instead of just a month to month lease.
Better yet, Congress could require that lenders provide foreclosed homeowners with the option to stay in their house as tenants for 5-10 years.This would provide immediate help to homeowners with no taxpayer dollars and no bureaucracy. But, intelligent life in Congress? Not likely.
Best idea I have heard yet. Bravo !! And maybe if the Government takes over some of these mortgages (toxic assets ??) it will do the same.
C
January 30, 2009 11:00 PM | Reply | Permalink
I'm not positive on this, but I *THINK* these toxic assets are derivatives that have sliced-and-diced these mortgages to pieces. When the bank forecloses, they get the house and our toxic asset is worth a bit less.
January 31, 2009 12:12 AM | Reply | Permalink
I'm sorry but this is ridiculous. Just forcibly renegotiate the mortgage contracts! If these people can afford to pay rent, then that rent can go towards their equity as homeowners. If they can pay a market rent, then their mortgage can be set so that, at market rent prices, they can not only pay to live where they live but can own where they live as well.
The solution is not to turn owners into renters. The solution is to reduce the monthly payments that home owners owe. That way, the homeowners still get equity for their monthly check. It's fair because, with reduced payment, they'll get less equity every month. But... in the end... that's the real solution -- just extend mortgage terms.
January 31, 2009 1:40 AM | Reply | Permalink
Exactly what I was thinking.
January 31, 2009 2:38 AM | Reply | Permalink
Over three months ago I proposed (elsewhere) a lease-option scenario.
The problem is that market rents are often below debt service costs. Setting the mortgage rate that low is a windfall greater in proportion than the executive bonuses.
The lease-option notion allows the homeowner to rent with an option to buy back in on some terms down the road. Another option is for an angel investor (government, government supported, or private) to buy into the property and then handle the lease-option.
January 31, 2009 6:11 AM | Reply | Permalink
Exactly, eds. I don't see why someone who bought a mortgage they couldn't afford should be allowed to get equity if they cannot pay enough to get it at market rates.
I think that something like the lease option may be the least bad option, although it dpes pose at least one significant problem:
Who will serve as the landlord/superintendant? Yes, I know htat hte bank might be the "landlord" in the sense that they collect rents, but who will be in charge of making certain that the house is kept up, and who will take care of problems for the renters or make certain that the house is in a condition for resale or renting to someone else if the current renters decide to move?
One other issue is that in some cases, the bank may have to evict the people anyway, because it is not clear that everyone with a foreclosure looming would be able to afford to pay a market value or fair rent, and it would be, as eds said, too great a windfall in some cases to adjust the rent downward until it is affordable.
January 31, 2009 9:21 AM | Reply | Permalink
The landlord would be either Freddie/Frannie, some angel investor, or a local government entity. The angel investor would get equity which like in Firt Time Homebuyer Assistance makes the investor/city/whoever a silent partner in the property, one who can be bought out down the road. Of course the lessee is not buying the property, so it's not as simple as FTHA in that sense.
Yes, this does not rule out future eviction, and I would construct the deal so that it could happen quickly and cheaply, the lessee would waive certain common rights if the lessee defaults on the rent/mortgage. The advantage of lease with option to buy is that the lessee has a built-in incentive not to default (paying a bit over market rent for the option or to build potential if not actual equity again), where a renter just stops paying the rent and squats or moves with no loss of equity.
My idea is purely transitional, and it needs to be fleshed out in details as to the contracts and any laws which might need to be amended or waived.
January 31, 2009 2:24 PM | Reply | Permalink
eds,
lease to own might be an incentive for many living in a particular house to keep the house maintained, whereas, just renting might be a disincentive.
January 31, 2009 11:04 AM | Reply | Permalink
Yes. And there are other incentives, and paybacks too!
January 31, 2009 2:26 PM | Reply | Permalink
"If these people can afford to pay rent, then that rent can go towards their equity as homeowners.
For the troublesome mortgages issued in 2005-2007 the "owners" have no equity, since prices are now back to 2003-2004 levels. The only way they would get equity would have been if the bubble had continued to inflate.
Mortgage payments, even 30 year fixed rate, build negligible equity in the first 5 years. The payments are almost all for interest, and the principle goes down very slowly. Mortgages like ARMs or the "Pick-a-pay" actually have starting payments less than the interest, so the principle goes up in the early years.
Converting to "owned by the servicer", is a good idea. The servicer has to hire a property management company anyway to maintain the property during the foreclosure to sale period. Keeping good, responsible renters in the properties at market rental rates should benefit all.
This should not affect the market for rentals, since the same residents are in the same units. Tossing them out, to find a rental unit elsewhere, would add to the demand for rentals and drive up rental prices.
January 31, 2009 10:25 AM | Reply | Permalink
Yes, tossing them out drives up rents but it drives down property values more or less equally (tho' not necessarily proportionately). It puts another empty house on the market. No rent or other income while vacant, cost of selling/maintaining until sold, or just rent it out to someone else?
Do rents need to rise towards falling housing prices?
As a renter, I hope housing prices continue to fall much faster than rents rise, at least until I can afford to buy where I would want to live!
January 31, 2009 2:30 PM | Reply | Permalink
The longer the crisis goes on, the more house prices will reflect their value as dwellings and the less house prices will reflect their value as investments.
You may also be in luck demographically, since there wil be a lot of baby boomers looking to liquidate their real estate holdings. This will depress house prices in the coming decades by further increasing the supply of available single-family houses as boomers move into condos, apartments, and assisted living quarters.
Even with the current low price of gas, it would be prudent to look for locations near jobs and with good public transportation.
February 1, 2009 1:03 PM | Reply | Permalink
Well said, Destor.
Right or wrong, we live in a culture in which home ownership and self-esteem are permanently intertwined. Therefore, the punitive tone one hears, even here -- as if everyone caught in the mortgage melt-down is a complete deadbeat -- is truly chilling.
Were some mortgages given to people who had no business accepting them? Of course. Greed-crazed flippers, for example. But what about the majority of those who accepted risky terms -- for example, the young (those without Wall Street parents) who were buying into the American notion of good citizen/homeowner stability? The divorced parents (male or female) with substantial responsibilities who were unable to get good terms on his or her own? Etc., etc.
This willingness to denigrate and punish those who were, at worst, too optimistic, or too uninformed, is Repug talk at its vilest....so thanks for restoring a sense of proportion.
Let's find a solution that is based in dignity/stability, rather than in either wholesale displacement or the requirement to wear a scarlet "A" (or in this case, a scarlet "R" for renter.)
January 31, 2009 8:09 PM | Reply | Permalink
This is the smartest idea I have seen so far as to how to deal with the housing problem. If the homeowner cannot make the payments and is forced to foreclose (which is probably illegal if the mortgage was sold as an MBS, but that is another topic) they would forfit ownership in the home, but be allowed to stay by paying a rent they can afford. Fannie and Freddie then do not have to take a writedown plus fees for the loan, insted they have a renter already tied to the home. Home prices will be flat or decreasing this year, but in 5 years they should be back to where they were in 2006. No writeoff, most of the interest is paid by the tenant, county and city property taxes are paid by fannie and freddie, home owners association is paid. Great idea, the government is the only entity able to take a long view of the situation, and this is a good solution.
January 31, 2009 4:18 AM | Reply | Permalink
And there are always unintended consequences.
As more single family housing is converted from owned to rented, pressure is put on multi-family rents. Landlords are less able to meet their mortgage obligations and municipal tax receipts are impacted.
The next real estate crisis looks to be commercial/multi-family mortgage defaults.
January 31, 2009 7:21 AM | Reply | Permalink
"As more single family housing is converted from owned to rented, pressure is put on multi-family rents."
Huh?
January 31, 2009 2:34 PM | Reply | Permalink
My observation is based upon a little known economic theory called supply and demand.
January 31, 2009 8:00 PM | Reply | Permalink
How's that? Supply and demand are increasing equally, since for every house you're converting to a rental you're also adding one family that needs to rent.
Besides, it was the bubble that drove rents down because everyone wanted to own a house and participate in the unlimited upside. Differences between costs of renting and owning were out of sight in the bubble cities.
February 1, 2009 10:44 AM | Reply | Permalink
why 5- 10 years?
January 31, 2009 12:21 PM | Reply | Permalink
Thank you, Dean. You get a hat tip at my blog for sitting at your computer on Friday night writing this stuff up.
January 31, 2009 2:48 PM | Reply | Permalink
For those that can afford rent then they can afford mortgage payments on the house so long as it is reappraised to a realistic market value and the principle balance adjusted to reflect current reality.
By renting the homes, mortgage holders can assign an income based value to the property that may not reflect market value or not adjust it for a long time into the future. This will allow mortgage holders to maintain unrealistic asset values on their balance sheets and local boards of equalization to forestall the negative adjustments in valuation that is about to start nation wide.
(Where is the MSM on equalization stories? Are they going to revalue homes en mass with a corresponding dramatic increase in mil levies to keep revenues as they are, or just hope people don't line up to protest their real estate taxes?)
Renting sounds good on the surface but not without addressing the necessary write down that has to occur along with the commensurate reserve balances that must show on their books.
January 31, 2009 4:28 PM | Reply | Permalink
Even with a writedown of the home to the current forclosure market value, the mortgage + taxes + insurance + maintenance is probably higher than the market rate for rentals.
This is because the price of homes reflects both:
- the value of the home as a dwelling place, and
- the investment value of the home to be captured by its future sale at a higher price.
In the case of homeowners with CLTVs of 80% or higher, the latter is really the price of a call option on the future price of the home.
The same math works for the mortgage holder. Even though they have to take a markdown in their investment, the difference between rental income and carrying cost of the property is the price they are paying for an option on the eventual appreciation in home prices following the current crisis.
February 1, 2009 12:48 PM | Reply | Permalink
What bothers me the most is that the banks and such are just sitting on most of these houses and letting them stand empty. Where they fall into disrepair and/or get trashed and do nothing about this. So they become a blight on the community or drug houses and the communities them selves wind up having to have them torn down.
When people could be being lived in them and would take care of them. It's just such a waist and a shame and nobody wins.
C
January 31, 2009 5:09 PM | Reply | Permalink
This would provide immediate help to homeowners with no taxpayer dollars and no bureaucracy
There are two problems with this statement.
1) Rental cash flow will not cover the mortgage costs so its value will have to be written down. Since the US government has guarenteed Fanny and Freddie notes, it is the taxpayer that will have to pay the difference to the bondholder.
2) Maybe no bureaucracy, but someone will have to manage the property. That costs about %10 of rental income.
I do support this idea because the social costs of vacated foreclosed homes is even higher. But we should recognize that the taxpayer will be paying for it.
January 31, 2009 9:33 PM | Reply | Permalink
Syvanen,
When I was saying that a law requiring that foreclosed homeowners be given the right to rent their home would have no cost to taxpayers, I was referring to mortgages holders more generally, not Fannie and Freddie. Of course, since most will be bankrupt and fall into government hands, I guess there will still be a cost to taxpayers insofar as it lessons the value of the mortgage.
January 31, 2009 10:58 PM | Reply | Permalink
eds, that's a good point but I wonder if debt service costs couldn't be reduced, perhaps by regulation. Part of the servicing costs are the interest rates the banks wanted for lending the money, after all. That can always be reduced, even if it irks a hedge fund that bought the bond.
January 31, 2009 10:49 PM | Reply | Permalink
Sure, reduce the contracted amount. Better yet, why not just give away houses instead, and free cars too. And pave all the roads with chocolate and gumdrops. What a nice little paradise we can legislate. Except that in the future there will be no hedge funds willing to buy those bonds, nor any banks willing to lend money to home buyers. Would you lend money if the gov't could just dictate that your terms would be changed? Do you people even think?
February 1, 2009 9:55 AM | Reply | Permalink
Your attempted sarcasm about a free giveaway paradise seems rather ironic considering what tax payers are currently doing for the banking industry, or did you already forget?
If banks don't want the government dictating the terms of their loans then they shouldn't fail to the point that the government has to take them over. Your free market whining lost relevance some $700 b ago.
February 1, 2009 12:50 PM | Reply | Permalink
Exactly. Tell me about the sanctity of debt contracts when the people writing those contracts aren't inhaling taxpayer bailout money and ever increasing rates.
February 1, 2009 2:19 PM | Reply | Permalink
The problem was caused by the gov't creating a market for sub prime mortgages (fannie and freddie buying them) while pressuring banks to make the loans. Spin it how you want, if you start doing the things you are suggesting, banks will not make loans to anyone without at least 50% down and at sky high rates, and there will be no market for these securities because no investor will touch them.
February 1, 2009 8:15 PM | Reply | Permalink
The market for subprime loans was made by investment banks, who bundled sub-prime mortgages with prime mortgages, sliced them into tranches of varying creditworthiness, got insurers like AIG to insure the poorer tranches so that they would get a credit rating upgrade, and then peddled them to foreign banks, hedge funds, pension funds, endowment funds, etc.
The were not usually originated by retail banks. And they were not usually bought by Fannie and Freddie until those organizations were pressured politically when the wholesale channel started to go sour in 2007.
Sub-prime mortgages were typically originated by mortgage brokers, who peddled them through mortgage wholesalers to the investment banks, or they were originated by mortgage specialists like Countrywide or IndyMAC.
See http://ml-implode.com/ for a list of 326 "imploded" mortgage lenders. Almost all institutions have closed their "wholesale" mortgage business and cut off the independent brokers due to the high rates of default on mortgages originated through brokers.
See http://www.miamiherald.com/multimedia/news/mortgage/originators.html for a story on Florida mortgage brokers with criminal records, many of them with priors for fraud.
February 1, 2009 11:48 PM | Reply | Permalink
This is the kind of chickenshit half-measure we've come to expect from late/unlamented Bush Administration. I KNOW we don't want these American peasants getting all uppity, but it IS better to renegotiate their mortgages and let their "rent" be mortgage payments, instead of screwing them with a lame plan that would cost them whatever equity they'd built up. Bailouts or not, the THIEVES in our finance industry must eat some of this abomination.
February 2, 2009 12:42 PM | Reply | Permalink