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Right to Rent: A Reminder of a Simple Fix to Alleviate the Foreclosure Crisis

Dean Baker again writes about his right to rent proposal, which is very worthwhile, so I feel I should just update every few months and point to it.

The overwhelming majority of mortgages that have been issued since the financial meltdown in September of 2008 have been bought by Fannie Mae and Freddie Mac or insured by the Federal Housing Authority. This has led to an interesting, but predictable, outcome. The most recent data indicate that more than half of the new foreclosures are on houses where Fannie and Freddie either hold the mortgage or have insured the mortgage-backed security in which it sits.

Rather than being a problem for banks to deal with, the problem of foreclosures is now primarily a government problem, since the federal government now owns and controls Fannie and Freddie. This means that President Obama no longer has to beg the banks to allow people to stay in their homes. He can do it himself. And, he can show the banks how to do it right […]

As part of the foreclosure process, homeowners would be offered the opportunity to stay in their home, paying the market rent, as determined by an independent appraiser. This is the same sort of appraisal process that banks use when considering a mortgage application. It can also be structured to ensure that millionaires are not gaming the system. The limits can be set so that the option only extends to homes that cost less than the median price or less than 1.5 times the median price in a metropolitan area.

It’s definitely an option, something that Fannie and Freddie have actually attempted with a very small pilot program that ended up restricted to all but a few borrowers. The banks get some return on the mortgage while holding onto the underlying property, and homeowners get the stability of remaining in their communities and paying a reasonable rental fee to keep in their homes, rather than being uprooted. Renting would be a good option particularly in the bubble states, where the cost is as much as half that of a mortgage bought at the height of the runup in prices. What’s more, the President could require this solution for Fannie and Freddie loans without input from Congress.

It’s certainly a more preferable solution than giving away the homes.

City officials are in preliminary talks that could lead to donations of foreclosed and abandoned properties from the banks holding the mortgage loans.

Negotiating for an exit strategy from the mortgage meltdown, representatives for a foreclosed properties servicer that works with major banks met Monday with Dayton city officials to discuss the abandoned properties.

How the early discussions will shake out is unknown, but a potential outcome includes transferring some properties clogging up bank balance sheets to a land bank or some other public entity, a move that occurred earlier this year in Chicago.

That’s literally the last resort for the banks at this point – handing over homes that they’d rather not maintain. Why not keep them in the hands of the original owner, through an own-to-rent transition?

This is obviously not a panacea. There’s substantial question as to whether the banks actually own the homes in foreclosure at all, so transitioning to rent doesn’t really change that, and it could have the effect of waiving a due process claim from the homeowner, forcing them to give up the ownership claim on the property without a fight. And it’s not like there aren’t other strategies available. Mandatory mediation between borrowers and banks has yielded substantial results everywhere it’s been tried, which experts following the housing market have known for two years. There’s the HOLC option, where the government buys up distressed mortgages from banks and negotiates a modification that allows the borrower to stay in the home. HOLC made a profit with this strategy during the Depression.

But anything is preferable to the current model of kicking people out of their homes, often in error, and the attendant ravages that imposes on the economy.

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David Dayen

David Dayen