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It's Better To Rent Than Foreclose
Imagine that you (like six other homeowners on your block) are hopelessly behind on your mortgage payments. You can't sell the house; the market is glutted. Anyway, there's no point in trying because the mortgage balance exceeds the value of the dwelling.
What to do? Nothing much, except to watch the neighborhood go to seed and wait for the sheriff to show up.
Unless, that is, you are one of the (relatively) lucky 1,000 mortgage customers of Bank of America who will soon be offered a deal?in which owners in default sign over their houses to the bank in return for the right to rent them back for three years at the market rate or below. That's a trade in which everybody wins, and it raises a trillion-dollar question: Why didn't BofA, and every other bank, try this three years (and 8.4 million foreclosures) ago?
Think how sweet an arrangement this could be. An ex-homeowner gets to stay put for years, provided, of course, the household can afford the rent. No need to move the kids to a new school, to face the humiliation of eviction, or to find another place to live. The bank, for its part, skates past the hassle and cost of foreclosure (which averages about 5% of the face value of the mortgage). It also avoids the problem of selling quickly into a dismal market or managing an unused property that is catnip to vagrants and vandals. As a bonus, the deal generates some income.
The neighbors win, too. Nobody wants to live in a sea of unoccupied property decorated with "For Sale" signs. Even the broader community comes out ahead. because additional rental housing would reduce rental rates.
The idea of renting to owners in default, which has been kicking around since the Depression, was revived by economist Dean Baker of the Center for Economic and Policy Research in 2007. The Federal National Mortgage Association, Fannie Mae, has actually had a modest "deed for lease" program on the books since 2009 (but doesn't publicize it much).
So why has it taken this long for a big bank to try it? We can conjure a number of reasons. In a bow to the real-estate lobby, Congress long ago barred lenders from going into the rental business. Yet banks do have the legal right to lease properties they acquire through default for up to five years. And if banks had good reason to fear regulators swooping down if they embarked on a rental initiative, they surely aren't worrying now. In January, Federal Reserve Chairman Ben Bernanke issued a white paper on housing fixes that leaned heavily on the idea of easing the glut of homes for sale by channeling them into rentals.
The real problem, we suspect, is the banks' worry about precedents?that if they offer to rent to some owners in default, public opinion may force them to offer the same deal to all. Then there are the issues of who sets the rent, and whether obstinate tenants can be evicted if they get behind on payments or when their leases expire.
More than likely, then, banks need a push. To this end, regulators could certainly push them, but such micromanagement would generate its own problems. The Obama administration, for its part, could press Fannie Mae to expand its deed-for-lease program, reaching out to mortgagees in default and offering them more than the current one-year lease deal.
Probably the best approach would be legislation that clarified the rights of banks and owners in default in the rental market, and created mechanisms for setting rental terms and eliminating ambiguity about rental-contract enforcement. The only bill we know about that addresses the issue was introduced in 2010 by Rep. Ra?l Grijalva, a Democrat from Arizona. But that bill only confirms the banks' suspicions about losing control of their property: It would give every homeowner in default a "right to rent" for five years, and give the courts discretion to set rents.
It's fair to say that Mr. Grijalva's right-to-rent bill is going nowhere in Congress. But legislation limited to encouraging rentals to owners in default ought to be palatable across the ideological spectrum. Would that be too much to ask of a bitterly divided Congress in an election year?
It's a long shot, but surely worth trying. How many other ideas are out there that would help all parties in the housing-market bust, yet cost the government nothing? In the meantime, we can only hope that Bank of America expands its program, and that other lenders have the courage to follow its lead.
Re: It's Better To Rent Than Foreclose
I'm trying to imagine this in real life though. First of all, banks don't want to own houses. Second, if something went wrong, would you call the bank and ask them to replace the furnace or fix a leaky roof? How would that work?
I get the idea behind this...I just don't think it's a super viable solution.
My Lunch Blog
That's what stuck out to me. The article talks about how it's good for the homeowner (although I suspect many people aren't all that stoked to be renting in a house they used to own) and the neighbors, but it's the bank that's making the business decision to do it. It's only in a climate like this, where they are losing hand over fist in foreclosures, that it makes any kind of sense. I suspect the overhead of developing infrastructure in the bank (which is normally not in the business of being a landlord) to have this kind of arrangement is what's making a lot of banks hesitant to go down this road.
Um, yeah. Are the banks willing to pay to maintain these houses? Because if the homeowners have to pay to replace the roof or the a/c, why bother? I as a Jane Q Homeowner am financially better off ditching the house and moving into a rental where the landlord will pick up those expenses.
What happens after three years? Does the bank push the tenants/former homeowners out and sell? What if the market hasn't recovered by then? Does the bank just continue to rent the house out indefinitely until the market recovers?
Meredith, 6-1-06 and Alex, 11-5-09
I saw piece on this on CNN, what the bank would do as far as maintenance is hire a property management company to handle it. The property management company would then make repairs/replace things. I don't know what happens after this though.
First, the banks' primary goal would be to sell the houses back to the owners, or at least it would be in my world of rent-to-avoid-foreclosure. Otherwise, I assume the banks' goal would be to sell the houses as rental properties since I am inclined to agree that they are not interested in owning and managing them in the long term. Nevertheless, BOA has already started doing this, so apparently it's not out of the realm of possibilities. Moreover, I'm not inclined to dismiss this idea out of hand simply because it seems like it might be complicated. This entire situation is complicated. Let's not play bumper sticker politics and pursue only those solutions that can be explained in a sentence or two, particularly when those solutions might be beneficial to the homeowners and taxpayers.
Second, the argument that damaged pride poses a barrier is a bit confusing to me. These people are about to lose their homes anyway. Is the ability to remain, albeit as a renter, really worse? From a pure economic perspective, the answer is almost assuredly no.
Finally, I've yet to see a better alternative. To put it crudely, this option manages to offer something positive to everyone involved, while simultaneously allowing everyone to feel good that everyone is getting screwed on some level, too.
At the very least I'd like to see a comprehensive discussion about this idea on a large scale. For a variety of reasons, I think that keeping someone in his/her home is more than just a good talking point.
Thank you for sharing. This has been my assumption, although I haven't seen/heard it articulated anywhere.
that's what I thought of when reading the article, as well. I also wonder what would happen if the former owner/current tenant stopped paying rent to the bank - I'm sure the laws for tenants versus owners are different, and likely some are more tenant friendly. Banks could find themselves managing evictions and then still being stuck with houses. Perhaps those concerns are addressed in Rep. Grijalva's bill.
Don't get me wrong, I don't think it's a bad idea. If it's a good and cost effective strategy, the banks will do it own their own. The question then is, why haven't they? (That's what I was trying to answer. Yes, the whole thing is complicated, but purely from the bank's perspective, getting into a whole new business may or may not be more or less complicated and/or cost effective than dealing with a glut of foreclosures). The banks will only do it if it is beneficial to them...so what if it's not the best solution for them? Then, you get into having to provide some incentive to tip the scales. What's the best way to do that?
This is where I'm at. Is it the best possible outcome? Probably not. Is it better than what's happening now? Yeah. Has anybody proposed something better? Not that I can see.
And contracting with a property management company to take care of repairs & maintenance wouldn't be that difficult. If a bank owned a critical mass of houses in one area, I'm sure it could get a good deal with a management company.
I'm not getting the "banks don't want to be landlords" argument. Probably not. But they certainly want SOMETHING for the money they lent. This is actually a lot easier than adjusting a mortgage, which is next to impossible if you are underwater anyway. The bank gets the collateral, AND they get enough money coming in to take care of the property (which is probably not worth what they bank put up for it) AND they get someone living there who, in theory, cares enough to maintain the property in liveable condition.
I think the NPR story I heard about this said that the owners are basically signing 3 year rental agreements, but they won't get kicked out after that. Theycan re-evaluate and lengthen their time there. Or maybe in 3 years they can save enough to buy the house back. So say you owe $400k on your mortgage and the house is worth $275k. You turn it over to the bank. You pay $1500/month in "rent" which covers property management, major repairs, and the bank gets some money out of it too. In 3 years the house is worth $300k and you buy it back. The bank is technically out $100k, less a few thousand they picked up from renting, but it's better than sitting on a house and being out $400k. And/or having the house deteriorate over the next 3 years while vacant, driving the price down even further.
40/112
You'd think.
We were renting a house in Florida on which the owner foreclosed. He bought it when the Florida housing market went BSC, thinking it would double in value and he'd flip it and make a killing. Meanwhile, undetonated WWII shells were found at a middle school half a mike away, causing a huge regional panic which meant no one was buying in that neighborhood (as if they would have anyway).
Of course, the house dropped to less than half its value and the owner threw in the towel. The RE lawyer we consulted said the bank could evict us, but we could ask them if they'd rent it to us. So i tried, but those douches wouldn't even talk to me.
Well, the joke was on them. House sat vacant for a year. Idiots.