Baker-Samwick does allow rental properties to be sold

By Felix Salmon
July 15, 2009

John Carney thinks that the Baker-Samwick plan would create “havoc” in securitized mortgages, and points to Tom Lindmark:

I suspect that more than a few of the investors that own these mortgages might not be thrilled to see their contractual rights to foreclose on the property and dispose of it are going to be real happy to learn they’ve just been turned into long term investors in real property. They probably just want to get whatever is left over from a bad investment and lick their wounds for awhile. Instead, the government is going to make them stay in the game.

Let’s nip this one in the bud: there is nothing in this proposal which says that the owner of the property can’t sell it. Indeed, quite the opposite: Baker and Samwick write that “the mortgage holder is free to hold or sell the property as they choose”. Which in turn means there will be no havoc wreaked in securitized mortgages.

Banks, once they’ve foreclosed on a property, are still free to sell it, if they so desire, to the highest bidder. But the buyer of the house will have to continue renting it, at market rates, to its current inhabitants, until they either fall behind on their rent or move out. Which is no great hardship — that’s what landlords do.


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But what does it say about who they can rent it to, and for what? I imagine that buying a foreclosed property which must be rented to the former owner would be rather like buying a property in NYC with a rent-controlled tenant – i.e. it depresses values. Maybe I’m rather foolishly applying a New York mindset to parts of the country that desperately need this bill, and where market rents and what the former owner would be able to pay are similar numbers. But by and large any restriction on the use of a property is going to depress its resale value, and therefore recoveries, no?

Fair point, Gari, but using the same metrics, the areas that are most in need of assistance are not Gary, Indiana, but rather coastal cities where the bubble inflated most. Therefore, applying a New York/Los Angeles mindset IS appropriate. And on that measure, there is clearly far more appetite for real property unencumbered by leases than there are investors.

Further, said investors will be looking for a return somewhere in the 8% cap range. If you go to the market today, I suspect you’d see returns somewhere in the 4% cap range. The price would have to fall commensurate with market returns, thereby putting securitized investors in the following quandary: either sell at prices even below market prices for unleased houses, or be effectively precluded from selling until the borrower falls behind on rent or moves out.

Seems like a pretty crappy obligation to force a lender/investor to wait for someone to default twice: once on the mortgage, once on their lease.

Posted by Muji Samovar | Report as abusive

Agreed. This actually makes the program worse. The value of a rental property will not be the same as an owner-occupied one, so this will decrease the amount the bank can get for the foreclosed property. Even if the bank does sell it to someone willing to let the original owner/defaulter live there, what happens when they do move out? Does it get re-rented? Or is that “landlord” now trying to re-sell the house? How does the landlord make a business decision about this when the tenant has no lease or obligation to stay for a given term?
It’s a bad deal for anyone. Even worse, if it results in large numbers of properties permanently converted to rentals, it will depress property values in those neighborhoods in perpetuity.
Another one of those ideas that looks good at first blush, then dies on the details.

Posted by Rockfish | Report as abusive

But it looks like a good way to decrease the incentive to foreclose, and a good way to increase the incentive to short sale or rework the mortgage.

Since those are better outcomes than a foreclosure, I’m all for it.

Posted by Dollared | Report as abusive

Lindmark’s blog is weak

Posted by CarneyRat | Report as abusive