StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Own-to-Rent on Capitol Hill

22 May 2008
Posted by Andrew Samwick

Congressman Raul Grijalva (D-AZ) introduced H.R. 6116, the Saving Family Homes Act of 2008 today: 

The Act would grant homeowners whose mortgages have been foreclosed the right to petition a judge to allow them to remain in the home as renters, and pay a fair market rent. The rent would be set by a court-appointed appraiser and adjusted annually for inflation.

The Saving Family Homes Act is one of the few proposed remedies for the current mortgage crisis which requires no expenditure of federal funds or additional bureaucracy, while giving immediate relief to millions of families facing foreclosure and preventing home vacancies that harm neighborhoods.

To prevent abuse by speculators, the Act limits eligibility to mortgages on single-family, principal residences, occupied for at least 2 years, which sold for less than the median home value in the metropolitan statistical area in which the home resides or the median value in the state if such information is not available.  

It is based on Dean Baker's "Own-to-Rent" proposal for avoiding foreclosures that I think is the best proposal that has been discussed to date.  Here is Dean's House testimony before the Domestic Policy Subcommittee of the House Oversight and Government Reform Committee from yesterday.  Here is an op-ed we co-authored, "Save the Homeowners, Not the Hedge Funds."  Here are some earlier posts.

Enjoy!

"Own-to-Rent" might have helped Rep. Richardson

"THE MORTGAGE-MARKET meltdown has gotten big enough that even Congress is taking notice."

Not only notice, but some are going through foreclosure themselves . . . like Representative Richardson

http://latimesblogs.latimes.com/laland/2008/05/report-lender-t.html


Is this dumb, or what?

Likely scenario:

I got a 0% down mortgage that I could barely afford. Then, my company downsized and I got demoted. Now I cannot pay my mortgage, and the bank will foreclose. Oh, wait, I'm saved! Congress will force the bank to rent me the house at 'fair market value.' Oops, I'm screwed! The fair market value monthly rent is almost the same as my monthly mortgage payments.

With mortgage interest rates of 6% or less, there will be few cases in which fair market value house rental rates will be less than monthly mortgage bills. I can't see how this bill will accomplish anything other than convincing a few home-owning voters that Congress cares about them. I'm surprised to see an economist endorse this sham.


Fair market value could be far below original purchase price

Renting based on "fair market value" could give a big break to the homeowner. If I bought the house for $550K and it is now worth $300K, the rent payment should be based on the new lower market value.


If the monthly payment is the

If the monthly payment is the same, say, still one difference is that as renter the bank would be responsible for home repairs. If it's an older house this can mean something.


Second thoughts

The more I think about this the more I'm wondering about moral hazard.

A good example is my Senator (Norm Coleman) who refinanced his home 12 times in 14 years . . . and now has a 775K mortgage on a house valued at (depending on source) around $537K. He originally purchase the home for 172K.

So . . . rent-to-own, based on market value of the home, for those going through foreclosure gives people like Senator Coleman a break, and actually rewards them for fiscally irresponsible behavior.

I hadn't considered the serial re-fiers, using their homes as ATM machines over the years.


Better than the Alternatives

Dr. T, I agree with Minnesota Mom--I don't think the set of people who could legitimately avail themselves of this is empty. You can think of this proposal as a way to strengthen the bargaining position of the borrower relative to the lender in the resolution of the foreclosure. I don't think that's unreasonable given that the real sham here was the way many lenders went about their mortgage business during the bubble. The borrowers don't get any housing equity, which is appropriate, but they don't lose their place to live. If I have to make a tradeoff given the collapse of the housing market, that's one I'm willing to consider. Andrew

Wasn't I clear enough?

I was not objecting to the proposal because it would hurt mortgage lenders (though it would). I argued that in most cases house rental costs would be at least as great as monthly mortgage payments. Having recently rented a $350,000 house (while looking for one to buy), I can assure you that rental costs are high since they typically cover mortgage, property taxes, upkeep, and a profit margin of 20% or more.

A prototypical family facing sub-prime-related foreclosure is not living in 1300 square foot, $50,000 home. Instead, this prototypical family lives in a 3300 sq ft, $450,000 home that would rent for at least $3,000 per month. A 30 year mortgage at 6% interest has monthly payments of ~$2,700. So how does renting help? It would only help if rental prices are absurdly low.


Underwater homes

Dr.T,

I agree this wouldn't work for every situation. But in the case of a home which has rapidly depreciated (if that $350K home now has a market value of $170K, for example) it would seem reasonable to set the rent based on the new, lower market value, to benefit both parties.

The lender has a choice -- foreclose on the delinquent owner and send the property to auction or negotiate a rent-to-own contract, with lower payments, to keep the family in the home.

Either way the lender loses money . . . but rent-to-own is less disruptive to families and community (including local businesses).


SwapRent (SM) - the realization of economic renting

Andrew,

I'd like to invite your blog readers visit our site at http://www.SwapRent.com and provide further comments. Thanks.




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