Right-to-rent gets more traction

By Felix Salmon
July 20, 2009

Obama administration officials are now going on the record when it comes to what I’ve been calling the Baker-Samwick proposal but which Dean Baker has now much more pithily rechristened the right-to-rent plan:

A top Treasury Department official told a Senate panel yesterday that the government is considering a proposal to allow homeowners to stay in their home as renters after a foreclosure…

“It’s certainly an idea we’re thinking about,” Herbert M. Allison, assistant secretary for financial stability, told the Senate Banking Committee.

The idea was first floated by Dean Baker in August 2007; Andrew Samwick signed on, from the other end of the political spectrum, almost immediately. (Contra Joe Nocera, this idea was not “first broached” by Dan Alpert in October 2008; the Alpert plan is needlessly complicated, and involves giving away to homeowners a valuable option to repurchase their homes which is neither necessary nor desirable.)

It’s worth noting that the right-to-rent plan is very different from the existing Fannie Mae plan which allows homeowners to rent their homes on a month-to-month basis, if they give up their cash-for-keys option whereby they get paid for moving out. Renting month-to-month is not a happy state of affairs: your landlord can kick you out of your home at any time. It’s easy to see why most homeowners would prefer cash up front for moving now. Under right-to-rent, by contrast, the homeowner can stay in the home for at least five years, if not ten.

In an ideal world, banks which foreclosed on homeowners would then sell those homes to professional landlords, who would rent the houses out in perpetuity, either to the former homeowner or to renters who moved in after the homeowners moved out. That would raise the amount of rented housing in the US, and decrease the homeownership rate — and lower homeownership means lower unemployment. This plan isn’t just good for soon-to-be-foreclosed-upon homeowners, it’s good for employment, too!

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Comments
9 comments so far

Hi Felix. I went back and read your post you have linked from this. Just wanted to point out a possible flaw in the logic/causal direction. Which is that the data isn’t cut by the age (as in retirement) of the population. Retirees are more likely to own their homes. The more retirees there are, the lower the ratio of employment to home ownership. I can think of a few other variables that would similarly skew the logic of this (such as expanding employment in a region attracting workers who will take some time before buying)

Posted by NoName | Report as abusive

Even if there is correlation, that doesn’t mean there is causation. If anything it’s backwards – high employment (lot’s of workforce mobility) creates a demand for “transient” housing that is filled by rentals. I seriously doubt making most of America’s far flung suburbs into rental properties will boost employment.
If we are to believe the American post-war home ownership mythology, ownership = stability = property value = prosperity etc.

Posted by Rockfish | Report as abusive

I love it!

First, some bank gives me a huge sum of money, based on some funky appraisal and my best guess about how much bonus I would earn this year.

Okay, I confess. “First” is a bit of a stretch. I’ve done this five times in the last 10 years.

Anyway…so I use the money to pay off “First minus one” loan and also buy a new truck, a new big screen tv, and a really cool Sony Wii.

Well, things haven’t been going well lately so I missed a couple payments. This bank had the nerve to send me a nasty letter. Knowing that I was never going to catch back up I said the heck with it. In my jurisdiction, the bank can’t foreclose for another ten months, so I’ll just live here “rent free” until then. Worst case they get my house. They’ll never touch my toys.

Sooo…Mr. Obama, if you plan on making me some kind of offer where I have to now start paying rent, you’d better make the rent pretty low.

This continues to be a bad idea. Let’s say home with a $400,000 mortgage goes into foreclosure.

In a foreclosure sale, there is a market clearing price (let’s say $200,000) determined by competition between bargain hunting “would-be owners” and bargain hunting future landlords. If the “owners” win, they are happy homeowners. If the investors win, they are free to rent the property at the market rate or fix it up for resale.

If you force the bank to rent the property, the “owners” are forced out of the market. Unless there was a miracle and the rent charged was the actual market rate, the banks would lose more money as the only bidders on the properties would be potential landlords.

Posted by Brad Ford | Report as abusive

Felix,

thanks for pushing this. I have some hope that right to rent may actually get somewhere now. I assume that you have heard the old line attributed to Churchill: “You can always count on the Americans to do the right thing, after they have tried everything else.”

It is starting to feel this way with the various loan modification programs. They can always do a few more tweaks and thereby help more people, but it is clear that these programs have done nothing for the overwhelming majority of people facing foreclosure. If the Obama administration and Congress are serious about trying to help people losing their home, it is difficult to see a serious alternative to right to rent.

Dean Baker

Posted by Dean Baker | Report as abusive

I am a real estate broker and attorney in California. I never made much money during the boom, because I started telling people in late 2004 that the increase in housing prices was unsustainable, and far more than was justified by supply-constricting land use restrictions.

From the beginning of the bubble popping, I have advocated some form of right to rent. The idea came to me when watching a web video about the plight of Inland Empire homeowners who took out sketchy 100% loans to buy $450K tract houses. One borrower remarked that a house identical to his and down the block, was advertised on Craigslist for rent at about 1/3rd of his total house payment (principal, interest, taxes and insurance). It occurred to me that for that borrower, who appeared to want to stay in the home, giving up paper title and renting the house long term at an affordable market rent would be an ideal solution.

Some people object to right to rent because it would clear out the owner-occupiers from the clearance sale of foreclosed houses. But the problem with today’s market is that there are very few buyers with the cash for a downpayment. To the extent there is a housing market at all, it is propped up by low downpayment FHA loans, which will be the next bubble to deflate as employment continues to crumble. Moreover, the housing market needs to be rebuilt on a foundation of buyers putting 20% down, so that the past decade’s experience is never repeated.

In other words, most of the real buyers out there are investors, who have always had to put more money down, except at the very peak of the credit bubble, and except for those who lied and said they intended to occupy the home.

The initial lease granted to the foreclosed homeowner should be for life, at the current market rent, adjusted annually for inflation. In addition, there would be a 13th payment required, spread out over the 12 months of a year, which would go into a security deposit and long term maintenance account. The new renter would have an option to repurchase the house at a market price, with the amount in that security deposit/maintenance account being credited against the sale price. If the tenant leaves, they would be refunded the amount in the security deposit account, less an amount necessary to compensate for the wear and tear to the house during their occupancy. Once of my pet peeves with the investment market for houses, is that maintenance has always gotten short shrift, and has never properly been factored in to underwriting. A house, far from being an investment, often takes money to maintain.

Bottom line: the former homeowner gets a home they can afford, and the banks get pricing clarity. Of course, the next step is to send in the FDIC to close down banks that would be undeniably insolvent upon the repricing of houses across the country.

Mortgage modification will NEVER work, because the pooling and servicing agreements (PSAs) governing so many securitized mortgages bar modification. If the government tries to force modification, they give the holders of the lower tranches of such pools a claim to litigate, which will tie everything up in knots for years.

Extending bankruptcy protection ex post facto to home mortgages would destroy the banks overnight, since under the above-mentioned PSAs, in the event of bankruptcy cram-down, the loss is shared proportionally amongst the tranches. For example, if a loan is crammed down by 40%, the holder of the bottom 5% tranche loses 2%, and is left with 3%. The holder of the top 50% is left with 30%. The problem is, the top 50% was rated AAA and a lot of it remains on banks’ books. They are counting on getting their money back to repay bond-holders, by getting at least 50% net after foreclosing and re-selling. If a cramdown hits their AAA paper, it would have to be re-rated, and would instantly trigger capital calls and have to be dumped at a firesale price, which would not cover their debts.

The banks may end up collapsing anyway, but if they do, it should be not from revising prior contracts, but because they are well and truly insolvent according to market measures. Creating a new market by right to rent would maximize what banks get, without throwing people out onto the street who want to stay in the house they bought, and who could pay a market rent. It is also legally unassailable, unless the bank can show that other occupiers would pay more than an investor.

However, the root of today’s housing crisis is that so many occupiers were willing to pay more than investors, driving the gap between ownership costs and rent to absurd levels. If we stick to our guns on requiring 20% downpayments, owner-occupiers will not pay any more than investors for a given house. Indeed, investors might actually wind up setting the price of housing, which will eventually make everyone better off, since the price of housing will be based on real business criteria, and not an emotional attachment to the granite counters.

The last wrinkle I would add to the right to rent program would be the possibility, after 10 years, of a sale to an owner occupier. Such a provision would have to spell out the amount of money the tenant would get in the event they chose not to buy the home, over and above their security deposit refund. It might be set at a year’s rent, or it might be some percentage of the seller’s profit, over their purchase price adjusted for inflation, or some combination of those two mechanisms.

Posted by David herr | Report as abusive

These days, buying a house can is a very big decision that should be a long thought out process. There are many pros and cons when it come to renting-vs-buying. Check out my website to learn more of the pros na dcons and advise on purchasing a house. the we address is….http://hubpages.com/hub/Buying-vs-re nting

I have been following this…the bill passed the house, but not sure if this bill has passed the Senate yet. This would mean so much. How long before we know if they will help people like me stay in our homes???

Posted by Karen | Report as abusive

American Homeowner Preservation(www.ahphelp.com) offers a program in which investors purchase homes on short sales from underwater homeowners and then provide the selling families affordable 5-year leases and favorable 5-year recorded options to repurchase. There is no cost to the homeowners or taxpayers, and most of the short sale savings are passed on to the familes – for instance, if they owe $100,000 on a home now worth $50,000, and AHP’s investor purchases for $40,000, then the family will have option to repurchase at $46,000 – 52,000. This provides incentive for families to stay, pay and repurchase; gives lenders prompt cash dispositions on troubled loans; and reduces blight caused by additional vacant bank-owned homes pockmarking neighborhoods.

American Homeowner Preservation is an active functional program which is helping homeowners now, and has already provided long term solutions to many at-risk families.

Posted by JorgeN | Report as abusive
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