Own to Rent, Nearly Two Years Later
Felix Salmon has been a one-man lifeline for an idea called "Own to Rent" originally proposed by Dean Baker and which I happily co-signed in an op-ed in August 2007. In a nutshell, the idea is to allow homeowners who would otherwise be foreclosed to stay in their homes as renters paying a fair market value. The mortgage holder would own the property, but the value of the individual property probably would be lower due to the option granted to the former owner. In this post, I consider how my thinking about the issue and the relevant context has changed in the past two years.
The original justification for the special treatment accorded to struggling homeonwers in my mind was twofold. First, if it were targeted, however imperfectly, at low-income borrowers in mortgages that were imprudently written, the plan would appropriately punish the hucksters who got us into this mess. Second, there are social costs to foreclosed housing, and keeping some continuity in occupancy would help counteract them. The plan Dean sketched out was designed to make sure that the former owners lost all of their equity -- they got the option to stay and pay rent but nothing more. It looked like the smallest way to intervene, without taxpayer funding and without excessively rewarding imprudence, to address these problems.
Given the attention that Felix has given the plan lately, and the rumblings it has gotten in policy circles since it was proposed, I thought about whether I would still endorse the idea today. The answer is "yes," particularly under the caveat that I expressed at the time that this is what I think we should do only if we choose to do anything at all to directly assist struggling homeowners.
But consider the change in the financial and economic environment since then:
- We entered a recession 4 months after the idea was launched, from which we have not yet emerged and which has barely shown any signs of easing.
- The idea of keeping bailouts on the smallest footprint possible, if it was ever considered at all, was blown out of the water starting 7 months later with Bear Stearns and then made a laughing stock 13 months later with AIG and TARP. I didn't support any of those bailouts in lieu of bankruptcy. But like them or not, it's hard to justify why struggling homeowners should get such ungenerous treatment (formerly, a point of pride in the plan) when other entities (AIG's creditors) have gotten much better treatment.
- Some things we were concerned about happening instead of this plan, like mounting pressure on Fannie Mae and Freddie Mac to absorb the toxic assets, has already happened, both before and after they were taken over.
- Through TARP and other programs, the federal government now has ownership stakes in some of the lenders that would take the hit if the own-to-rent options were exercised and if their exercise appreciably lowered property values (as Felix points out, it's not clear that having a long-term tenant paying fair market rent is such a bad thing). I'm not sure whether that makes it easier or harder to pass such a provision -- probably easier if the Chrysler bankruptcy is any guide.
- Over the ensuing months, we learned just how intractable the problem had become in an environment with so much securitization of mortgages. The financial consequences of the proposal are more uncertain than I thought originally.
Overall, I'd have to say that I am surprised that so little has been done to directly help struggling homeowners, at least compared to other groups in tough financial circumstances. Since there has been so little change in that area, I still think of Own-to-Rent as a leading proposal if it can legally implemented.