Unless I'm misremembering your original renter plan was rent-to-buy (that is, the tenant would have a purchase option).

Have you abandoned that aspect of the plan?

It really is amazing how dumb people can be. Here we are currently suffering the effects of the inevitable collapse of the largest housing bubble in history, and "serious" economists are actually proposing housing price supports as a way to cope with the fallout.

Apparently Blinder is unable to grasp the basics of bubble psychology. There is no realistic way to "stabilize" housing prices at inflated levels, since the only reason anyone ever bought in at these prices was the expectation of dramatic future price increases. Once prices stopped rising at double-digit rates, the buyers predictably dried up.

If prices were to be stabilized at currently inflated levels by government price supports, buyers would simply continue to stash their money elsewhere and rent. Therefore the only way to keep prices high would be to incite another period of rapid price escalation and attendant frenzied buying. Given that we are currently suffering the massive fallout from just such an escalation, any economist that would suggest such a strategy would be exhibiting utter incompetence (not that this would be truly surprising).

Got milk? Proposal 3 is designed to encourage borrowers-turned-into-renters to milk the properties, meaning that at the end of the rental period, they will be severely deteriorated.

Lenders are ill-equipped to manage single-family houses, which are scattered, and unlike the units in an apartment building, have different physical plants. Property managers often charge 7-10% of rents to manage these. Are banks really going to want to invest in repairs or capital items where they're already taking a large writedown? If not, are we going to see a series of implied warranty of habitabilty lawsuits where deadbeat owners demand that lenders put more money into the property?

Is the renter going to take decent care of the property, now that the renter no longer has equity? The WSJ reported, anedcotally, that in the Las Vegas ares, owners who have been foreclosed on have trashed the property on the way out; this proposal creates incentives for slow deterioration followed by trashing in year 5.

The net result of Proposal 3 will be to force the lender to offer the borrower a writedown to fair market value regardless of whether the borrower was a sleaze or can afford to pay. Fool me once, shame on you; fool me twice, shame on me: future lenders will have to price in this borrower option, with the result that interest rate spreads will kick up, values will be reduced below what they would be without this distortion, refinancing will be less affordable, and even more houses will go into foreclosure. If the bubble is going to deflate, lenders have to take a hit, but so do borrowers: they have to leave, unless the lender, without the pressure of a one-sided law, decides to do a deal.

Ellen1910,

I had never included a buyback option for former homeowners in my right to rent plan. I think it's great if that happens, but that is not a requirement under the law.

Jay,

I'm not sure why there would be more deterioration in these units as rentals than any other rental units. Banks that don't have expertise as landlords can hire management companies. I assume they would do this.

Jay Weiser is telling us why private enterprise can't cope with the housing problem, even with enormous bailout subsidies. Free enterprise can make a bubble, but it can't fix it. The Fed can't either, contrary to what Bernanke and other Fed supporters thought a couple of years ago.

Is there enough honest talent
in the housing/financial
industry to manage a homeowner bailout? I never see this question asked, let
alone answered.

From what I hear, neighborhoods in the Twin Cities are being damaged by having empty, foreclosed houses. The houses are stripped of copper, used as squats or by criminals, become fire hazards. The neighborhood in general becomes less safe and pleasant, which drives the price of still owned and occupied houses down.

This seems like a very strong argument for keeping people in the houses, even if they don't own.

I think this is Dean's right to rent post.

Actually, rather than become landlords, many banks may opt to do workouts, if throwing homeowners out on the street is not an option.

The issues that Jay brings up about the horrors of being a landlord make what Dean is suggesting above more likely and reasonable. Put laws in place that encourage the banks to work the bad mortgages out. It's not "fair" to people who didn't get in over their heads' during the frenzy and want to see people who did suffer, but it deflates the bubble and stabilizes neighborhoods. I'll take that deal.

Too much is being made about stabilizing house prices - what in the world does that mean ? What about the 2nd or 3rd mortgages ? Who can agree on how to do it. The Wall Street Journal had an article today that summed up the issue. House painter buys house he can afford only because him and wife have jobs (his job was good in the good times when there were lots of new houses to paint!) Providing there are jobs for people, there will be demand for houses at these new lower price points. Lets have a massive infusion of capital into Infrastructure that is needed and new energy construction like Nuclear plants. Then the house painter turned maintenance technician at the plant can afford to buy his house back and actually make the payments. No jobs - no housing stabilization. Pretty simple no ?

C'mon, being a landlord isn't that hard, particularly if you're a big landlord--which a lot of lenders might be. You hire a property management company for about 6% of the rent (at least that's the going rate here). And the assumption that tenants will just trash the place is offensive to the 35% of us who rent our homes. We do clean the bathroom, scrub the kitchen floor, vacuum (constantly if we have pets), and water the yard.

Dean & Peon are right. Being a landlord is NOT that hard. A colleague has several properties in hot city like Las Vegas, and the they are all well-kept. Of course there was time when young adults trashed the place, and deposit was insufficient.

One thing is valid is that financial institutions really dislike managing properties or even keeping those assets on the book because they demand capital to pose against them and also reserve.

So they would have to find prop. mgmt and then keeping non-earning assets (or not that high yield) combined with putting scarce capital and reserve. Good luck...

Dean:
There are other alternative solutions to the problems caused by the bursting of the housing bubble that don't involve trying to 'prop up' prices, that don't reward either party (neither the borrower nor the lender) to a bad mortgage, nor encourage current owners to further complicate the situation by defaulting on their underwater values even though they can make the payments.

As the vast majority (93%) of failed mortgages are ARM mortgages, the simplest solution is to: a) have the government facilitate the renegotiation of the new rate downwards; b) enter as an ownership 'partner' of the current owner, paying monthly the difference between the original 'teaser' rate and the new renegotiated rate. In exchange for this help, the new 'partner' (the government) will be the beneficiary of any increase in value to the home over the period of the loan, with the 'owner' forfeiting this right in exchange for help in making the monthly payments.

This process does many beneficial things: 1) it immediately reestablishes value to all troubled mortgages (they will now all be paid with a gov't guarantee) albeit at a lower value, thereby allowing mark-to-market balance sheets to function again, and reestablishing a market to all mortgage related financial assets (CDO's and other derivatives); 2) it allows the real estate market to find it's real, not false or 'propped up' value so that it can recover in a normal and healthy manner; 3) it encourages owners who are now underwater to see that there is light at the end of the tunnel, and if they hold on, their property will appreciate again over time, discouraging defaults not due to inability to pay but due to market discouragement; 4) most importantly, the amounts invested by the government are minuscule in any given year, (by my calculations less than 2 billion in any year if one were to take over all ARM mortgages... something that would not happen), freeing up desperately needed government funds for use in more necessary areas (infrastructure and Green industry creation, for example); and 5) it does not punish those who continue to pay their mortgages while rewarding those who bail.

IN my opinion, the solutions to the financial problems caused by bad mortgages can ONLY be solved by resolving the underlying MORTGAGE problems... not by recapitalizing banks or other 'treat the symptoms' solutions.

eRobin wrote, It's not "fair" to people who didn't get in over their heads' during the frenzy and want to see people who did suffer...

"I don't want to give handouts to people who don't deserve them" =/= "I want those people to suffer."

Furthermore, how are they really suffering? They likely didn't put much of anything down when they bought the house, and the fraction of the monthly payment going towards principal was probably pretty small.

So, the main suffering I see (as compared to renters) is that their credit rating is going to be trashed after they mail the keys in.

Cry me a river.

If they don't appear to suffer much if any, why do we need to help them?

I wish that people would learn something about renting before they talk about people with trashed credit trying to rent a house or apartment. In many cases foreclosed owners move in with relatives or friends because they can't find anyone to rent to them. Some people end up living in weekly-rental motels (which cost as much or more than renting a standard apartment) because no one will rent to them.

In fact, some people bought houses with dicey mortgages BECAUSE their credit wasn't good enough to rent a decent house or apartment, and with the foreclosure their credit is really trashed. And this isn't going to help them find a place to live.

Preserving neighbourhoods is a good idea. But implementing a rental rescue plan would require more than a small modification to the mortgage forclosure process. It would set up sitting tenants in the affected properties, with the result that the value of those properties would be determined, practically speaking, by the "fair rent", as determined by whatever body is assigned that task.

A sitting tenant reduces flexibility in future use of the property, and that inevitably affects its value (negatively); so the mortgagee can be expected to work to escape or avoid that prospect. This will give rise to a number of problems, some common to rent control regimes everywhere, and others specific to the contemplated arrangement. These would need to be addressed through a specialized tribunal of some sort.

First, it is not obvious that this could be applied directly at the Federal level. Most of the rent control regimes in the US date from a price adjustment measure introduced during WWII under, shall we say, rather different circumstances. The order established special zones in which controls would be imposed. These controls were later adopted by some of the affected states or municipalities after the war. Property relations are normally a state level matter, and a uniform Federal scheme would presumably face constitutional challenge -- especially if aimed at a limited class of properties; lenders, or foreclosure purchasers, would call it a constitutional taking.

Second, what is the scope of application? All mortgages subjected to foreclosure proceedings, for whatever cause? If only "predatory mortgages", they would need to be defined. Is there a cut of date or a period during which the mortgage must have been created? If so, what about refinancings and second mortgages? If there is no cut-off date or range of dates, this runs up against the same political risks as wartime rent control measures (i.e. withdrawing the entitlement would be difficult b/c politically unpopular). Lenders would anticipate this, and fight that much harder against its initial adoption.

Third, if the rental arrangement would be triggered by formal foreclosure proceedings, lenders can be expected to seek or devise other ways of realizing their interest in the property, or of making application of the legislation difficult. What is the effect, for example, of a transfer of title from the borrower to a third party (where that is permitted by state law and the title deed)? Or of a voluntary surrender of the property to the lender? If the lender does what the proposal seeks to induce, and there is a workout, does a default under the terms of the workout exempt the mortgagee from the terms of the scheme?

Specifically with respect to the rental arrangement, is the tenancy to be transferable, and if so under what conditions? Can it be inherited or devised by will, and if so to whom? What is the formula for setting rents, and is the tenant's ability to pay a factor? What is the effect of a transfer of title before foreclosure (i.e. to a mortgage rescue agent)? What is the effect of a voluntary refinancing arrangement?

There would be additional problems and lots more detail once you got stuck into implementing this. Which is not to say that the plan is necessarily a bad idea; but you would have to go into it with your eyes open to the bureaucratic and rulemaking requirements that it would spawn.

Stop Dreaming Start Action