July 20, 2009
Dean Baker
The Hearing (Washington Post), July 20, 2009
See article on original website
RealtyTrac released data last week showing that the foreclosure rate in the second quarter hit yet another record high, 11 percent above the first-quarter pace. Foreclosures are now running at a rate of close to 2 million a year.
It has been almost two years since the foreclosure crisis first became headline news. In this period, President Bush, Congress and most recently President Obama have put forward a variety of programs. None of them has had much impact on stemming the tide of foreclosures. It is time to try a different tack.
There is a simple solution that requires no taxpayer dollars, requires no new bureaucracy and can immediately help millions of people facing foreclosure. Congress can simply temporarily alter the rules on foreclosure to allow homeowners facing foreclosures the right to stay in their home for a substantial period of time (e.g. seven to 10 years) as renters paying the market rent.
The logic of this change is straightforward. Due to the housing bubble, ownership costs grew out of line with rents. As a result, in many bubble-inflated markets, mortgage payments plus taxes, insurance and other costs could easily be twice as high as the cost of renting a comparable unit. “Right to rent” legislation would allow homeowners who cannot meet their mortgage payments the right to stay in their home as long as they pay the market rent.
The lender would take ownership of the house and would be free to resell it, but the lease would carry over for the duration of the period designated by Congress, or until the former homeowner decided to move. In this period, normal landlord-tenant laws would apply, with the exception that the lender would not have the option to evict the former homeowner without due cause.
This rule change would provide homeowners with a large degree of housing security. If they like their current home, their neighborhood, their kids’ schools, they would have the option to remain there for a substantial period of time. Furthermore, by making foreclosure a less attractive option for lenders, a right to rent law should give lenders much more incentive to pursue mortgage modifications as an alternative to foreclosure.
This change should also be beneficial for neighborhoods that are plagued by large numbers of foreclosures. Keeping former homeowners in their homes will keep homes occupied, preventing the blight that often comes from vacant homes that are not maintained.
Needless to say, lenders will not be happy about a right-to-rent rule. It alters the balance of power between lenders and homeowners in the homeowner’s favor. The banks will undoubtedly object that changing enforcement rules interferes with their contract rights. Of course, they did not raise any issues about contract rights when Congress changed enforcement rules in their favor with the 2005 bankruptcy reform law. That reform applied more stringent bankruptcy rules to debt that had been contracted under the old bankruptcy law. With bankruptcy reform, the retroactive changing of the rules was never even raised as an issue.
The country is faced with an extraordinary crisis. The banks, the auto industry, and many other businesses have already rushed to federal government for bailouts. Right-to-rent rules are a way to help the homeowners who are suffering because of the failure of the Fed to rein in the housing bubble and bad mortgage practices. It does not provide any windfalls – foreclosed homeowners will still lose their homes – but it does provide housing security to millions of families who desperately need it.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.
