Own-to-Rent: The Right Bailout

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Dean Baker
The Guardian Unlimited, October 22, 2007 CommonDreams.org, October 23, 2007

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In the last couple of weeks, Treasury Secretary Henry Paulson has been desperately trying to arrange a bailout package for his Wall Street buddies who are drowning in bad debt. He has not yet found a way to make bad debt disappear without showing up as losses on corporate financial statements, but he is still trying.

Meanwhile, the subprime mortgage crisis is continuing to worsen, as the foreclosure rate has been rising all year. In the month of August alone, there were 19,300 foreclosure filings in Michigan and 48,800 filing in California, each equal to 0.7 percent of the stock of owner occupied housing. Nevada’s foreclosure rate topped the charts, with the 5,800 filings in a single month, equal to 1.0 percent of the owner occupied homes in the state.

The number of filings nationwide will likely approach 3 million by the end of the year, nearly five times the rate of 2004. This means that millions of families face the prospect of being thrown out of their homes. If our Treasury Secretary’s prior career had been anywhere other than Wall Street, he would be more concerned about helping these families than the boys at Citibank, J.P. Morgan and the other big banks.

While the bursting of the housing bubble has hit all segments of the housing market, the low and moderate income homeowners who comprise the subprime market are the most deserving of the government’s attention. These are the people who were most likely victimized by deceptive mortgage agents pushing mortgages with low teaser rates, that reset to unaffordable levels. It was also a matter of government policy to push these families into homeownership, even if it meant purchasing an over-priced house with a predatory mortgage.

It is possible to help these families without any big bailouts or new bureaucracies. Congress can simply change the rules on foreclosure (just as it changed the rules on bankruptcy two years ago), so that homeowners facing foreclosure will have the option to rent their home indefinitely at the fair market rent. This rent would be determined by an independent appraiser, appointed by the court. The appraiser would determine the fair market rent in the same way that appraisers determine the market value of a home before a bank issues a mortgage.

This measure would ensure that current homeowners could at least keep a roof over their head. If they like the home, the neighborhood, the schools for their children, they would have the option to stay in their home as long as they wanted.

More importantly, this change in the foreclosure rules would give lenders a strong incentive to renegotiate the terms of mortgages. Most lenders will not want to become landlords. They would have the option to sell the home, but the tenant would go with it, substantially reducing the resale value. Since the foreclosure option will be significantly less attractive, lenders will be far more likely to try to negotiate terms that allow current homeowners to remain in their houses as homeowners.

This own to rent provision can be limited by both the date of issuance of the mortgage, and the value of the home, so as not to seriously disrupt the workings of the mortgage market. In recognition of the fact that the housing market was subject to a bout of irrational exuberance, that hopefully will not be repeated, the own to rent option can be restricted to mortgages issued before July1, 2007 or some other date in the past.

To ensure that only less affluent homebuyers benefit, it can be restricted to homes that sold for less than the median price in an area. While it would be best if Congress took action so that homeowners across the country could benefit from an own to rent provision, each state has the option to pass an own to rent rule in the absence of national legislation.

The collapse of the housing bubble will almost certainly throw the economy into a recession and will cause many homeowners to lose much of their life savings. However, it is possible for Congress (or state legislatures) to protect the most vulnerable segment of homeowners if it approves an own to rent provision on foreclosures. The plans for bailing out lenders, whether with bank consortiums or Fannie Mae and Freddie Mac, should be abandoned. Moderate income homeowners deserve a helping hand from the government, rich and incompetent bankers do not.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.