In recognition of the extraordinary situation created by the housing bubble and its collapse, Congress could approve a temporary change to the rules governing the foreclosure process. This change would give homeowners facing foreclosure the right to stay in their homes, paying the market rent for a substantial period of time (eg seven to 10 years).
This seems like a truly terrible idea – so bad, and recommended by such an astute commentator, that I wonder if there is some aspect of it I fail to understand.
Let me initially acknowledge that the term “market rent” could be massaged to mean most anything. If the market rent, for example, were defined as the monthly payment on a fixed rate mortgage with an aggregate principal amount equal to the occupant’s outstanding balance, sure, great, let’s have a floating-fixed conversion and be done with it. But I don’t think that’s what Dean suggests.
What I think Dean suggests is that after a house is put into foreclosure, the occupant of the house should have some unilateral right to occupy it for a decade (note that the original mortgage obligated the occupant to service the mortgage or repay it in full – let’s assume Dean is not proposing that if the now-tenant wants to leave, he needs to make good the remaining rent payments).
Who, pray tell, determines the market rate? If the owner rents it to the highest bidder and the occupant just happens to be the highest bidder, the law has done him no favor. The occupant, just like anyone else, can always live wherever he chooses by topping the bid of the person currently there. No favors are done unless there is a formula that can set a rate that is something other than what the owner would like to accept, either in amount or in form (for example, the owner might prefer to sell immediately rather than accept the cap rate implied by local rental demand). Dean has just proposed a nationwide version of rent control.
Dean seems to take as his starting point an objection to the foreclosure rate in America. That’s fair, but blocking foreclosures in response is a bit like barring funerals to protest heart disease.
When someone takes out a mortgage, he pledges the house as security in exchange for a loan to buy it (depending on the state and type of mortgage, he may also pledge his other assets and income stream). Foreclosure takes place when the payments are not made.
Why would it be the lender‘s fault that the borrower did not make his payments? The lender would prefer to have the payments and not the house; the only reason foreclosure is on the table is that the payments are not being made. Why should the lender be asked to end up with neither the payments nor the house?
Perhaps this is the time to step back and think a bit about the mechanics of the housing bubble. People took on an ever-increasing amount of debt and house prices rose dramatically, especially in coastal areas with strict zoning and desert southwest areas with incredibly high population growth. Many people who were in these areas chose to refinance their houses and take out cash, but let’s leave them aside for now.
When a buyer pays more for a house than he would have based on historical relationships of house price and income, what happens? Well, the seller wins – he gets more money, and he is leaving the story. The realtors win – they get more money, and they leave the story. The buyer wins – he gets a house he could not have otherwise occupied, because if he had bid less the cover bidder would have ended up with the house.
The cover bid loses, but of couse he has no one to blame but himself for not taking the same risk as the winning bidder.
The big loser is whoever financed the buyer. That bank, quickly enough, is going to get into a situation where it is lending more against a property than the amount of money it can recover from seizing the property. Foreclosure is when the banks discovers the extent of its defeat.
To give some sort of right to rent to the person who has already benefitted by being able to occupy the house of his choosing for all the time up until eviction is absurd. Why should the bank get hit a second time for the buyer’s failure?
This entire argument is different from the question of whether mortgage modifications should be possible in the context of bankruptcy. In an overall restructuring, where all assets and obligations are on the table, I can see the importance of coming out with a global solution. Even in this scenario, however, a future attempt to sell the property would require a complete repayment of the mortgage principal; quite a bit different from being handed a decade-long rental contract.
What we need to address our housing problems is not fewer foreclosures but more foreclosures. We need a quick process of bringing delinquent houses on the market and driving down the price of housing. When the median income can afford the median house with enough cushion to provide for the vagaries of life, we will have a stable housing market. Not before.