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"Own to Rent" in Economists' Voice

24 Mar 2008
Posted by Andrew Samwick

Dean Baker provides a clear and concise description of this "Own to Rent" plan in the most recent issue of Economists' Voice. The key advantages of this plan:

It is worth contrasting this own to rent proposal with President Bush’s plan to freeze some subprime mortgages at the teaser rates. The plans differ along three dimensions. First, they will apply to somewhat different groups of homeowners. Second, the “teaser-freezer” plan may still leave many homeowners unable to pay their mortgages. And third, the own to rent plan is intended to be an actual change in the rules of foreclosure that is binding, not a commitment that is made or withdrawn at the discretion of mortgage holders.
I have been a fan of this plan since I first read about it. (Read a number of earlier posts here and an op-ed Dean and I co-authored here.) To summarize why, I don't think that equity holders should come out with positive equity in a bailout. The plan sets the starting point for negotiations to zero equity for the "homeowner" but doesn't put them out on the streets.

Read the whole thing.

policy should be fair to homeowners & investors

I like the proposal also. It seems close to a win-win type solution, where the new owners get the income that their property truly represents (and avoid further losses due to neglect and neighborhood abandonment) while old homeowners get to stay at reduced cost. I don't like the concept of letting the new renters stay as long as they like, however. It should be a new contract signed between the two parties, perhaps with a mandated option for a two year lease at appraised rental rates. I think the plan doesn't address another group, one that may deserve more pain than they are currently receiving. The melt down has caused plenty of pain to go around, but I don't see where those who are perhaps more deserving are getting their share. I imagine that much of the deceptive salesmanship was done by mortgage brokers or banks that flipped the loans simply to recover the fees without the underlying risk. These people are suffering because buisiness volume is low, but should, in my opinion, recieve more of the pain. Some method to pull back twice the received fees for parties that simply passed through loans that ultimately failed might incentivize better stewardship. People denigrate the investors/speculators, but there are near innocents here too. Like the unsophisticated home buyer burnt by teaser rates, there is the near retiree -- looking for more safety who got into AAA bonds, perhaps with reasonable diligence -- that is now taking equity-like losses, with potentially serious consequences. It is troublesome when people do the right thing and still get burned.

SwapRent (SM) - the realization of economic renting

Why would a bank trash its mortgage, incur lots of expenses and troubles to foreclose a property only to get stuck with the foreclosed property to become a landlord to the irresponsible borrower when it could simply leave its existing mortgage intact, give the homeowner in need a fair monthly subsidy and become a temporary "economic landlord" through a simple SwapRent (SM) transaction? The bank could subsequently transfer this real estate exposure through the SwapRent (SM) contract to some other investors much easier and cheaper than trying to sell the actually foreclosed property. This is a new consumer finance concept we introduced as "economic renting" of a property while letting the homeowner continue to keep the legal title ownership. For more details please review the research info at . Further comments would be appreciated. Thanks.

Will investors buy into the

Will investors buy into the SwapRent concept? They got burned on CDOs and SIVs, and this looks like a way to create a new bubble, especially if housing deflation continues.

I'm not sure there are any neat policy solutions to the present crisis. When foreclosure becomes an economic decision, void of shame or stigma -- which it is quickly becoming (note that a Congresswoman put the keys on the kitchen counter and walked away this week) -- then it begins to play out in an "unintended consequence" way.

Remember that market values have sunk 20-30% and more, and continue to be driven down in many areas of the country. Most people cannot sell their house in a timely manner today . . . and it looks like that will be worse a year from now. Increasing gas prices are an issue -- many suburbs are a significant commute from the cities.

College tuition costs are killing families . . . while elite colleges amassed hundreds of millions and billion dollar endowments (Harvard has $35 billion endowment) they did not assist the middle or upper middle class by using their wealth to make their product affordable -- the result is loan debt which is killing the younger demographic (ergo, they can't buy homes). There are many baby boomers sitting out there with home equity loans which were used to pay the bills . . . because home equity was used in the financial aid calculations and colleges expected (and actually encouraged ) use of HELOCs to pay the bills. Meanwhile these same colleges used their endowment income to build "ivory towers within the ivory towers", institutions which do not address student learning directly. Money that could have been used to create affordability in education was wasted on somebody's egotistical "legacy" (look at T Boone Picken's athletic monument to himself at U of Oklahoma for a good example). Unfortunately giving money for student aid doesn't get you a building with your name on it. There are many families finding themselves suddenly in a very bad circumstance financially because of education bills, and most of these were previously categorized as white collar middle/upper middle class.

More family income is going to gas and food and heating bills. The house becomes less affordable every month.

So home ownership is a bad investment. Period. And it will be bad for the next 10-15 years. Foreclosure is just another tool in the individual investor's box. You cut your losses, the same as you would on a bad stock investment by selling and getting out of it.

It's good to see private sector efforts. If concepts like rent-to-own or SwapRent can work, well that's great, but in a deflationary environment it looks like an uphill battle to me . . .

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