On yesterday's Marketplace Morning Report host Scott Jagow and I talked about one of the best ideas I've come across in dealing with families facing foreclosure. The idea comes from liberal economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington. It has has been picked up by Andrew Samwick, a conservative economist at Dartmouth University and formerly a member of President Bush's Council of Economic Advisors. This joint op-ed piece lays out the argument.
THE MORTGAGE-MARKET meltdown has gotten big enough that even Congress is taking notice. Members of Congress, especially those running for president, are now racing to propose bills that promise relief to the millions of homeowners who can't pay their mortgages.
They are right to act. In the run-up to this crisis, there was precious little counsel to families at the margin of homeownership that it could be better economically to not take on the commitment of ownership. There was aggressive marketing of deceptively worded mortgages that were virtually certain to reset to payments that these families could not afford. And the government has for years been abetting this process, pointing to ever-increasing rates of homeownership as a policy success and pushing for the low short-term interest rates that fostered the bubble in prices and the increase in leverage that precipitated the crisis.
In light of this history, it is important that policy be focused on assisting financially strapped homeowners, not lenders that issued deceptive mortgages or investors who foolishly speculated in mortgage-backed debt.
Some of the proposals currently on the table, for example, getting Fannie Mae and Freddie Mac more involved in the subprime- and jumbo-mortgage market, will do more to help the speculators than the homeowners. After all, if private investors are not prepared to hold this debt, why should these government-backed agencies jump in and buy risky mortgages at above-market prices?
There is a simple way to allow troubled homeowners to stay in their homes without also bailing out the mortgage issuers and speculators.
Congress can pass legislation granting current homeowners the right to stay in their homes as long as they like, simply by paying the fair-market rent. In other words, no one gets tossed out on the street, as long as they can pay the rental value of their house. The fair rent would be determined by an independent appraiser--exactly the same way that a lender is supposed to determine the size of a mortgage that can be issued on a home.
Under this plan, homeowners would turn over their property to the mortgage holder. This would generally not be a loss since borrowers currently face crises precisely because they owe more than the value of their house. If the value of the home exceeded their debt, then they wouldn't have to sign up for the program.
As a renter with secure tenure, the former homeowner would have incentive to do necessary maintenance and keep the home from falling into disrepair. This would prevent the blight that is already hitting neighborhoods where foreclosures have become commonplace.
The mortgage holder would get possession of the house, but they would be stuck having the former homeowner as a tenant. Otherwise the mortgage holder is free to hold or sell the property as they choose. Being stuck with a renter may reduce the resale value of the house, but intelligent investors knew there was risk when they got into the business.
To limit the size of the program and to ensure that it only benefits those who are really in need, there can be a cap placed on the value of homes that qualify. For example, Congress could stipulate that only homes with a market value below the median price for an area are eligible for this plan.
This security-of-housing proposal meets the needs of the homeowners who were victimized by deceptive lending practices and pro-homeownership ideologues. It gives them the right to stay in their home as long as they want. It accomplishes this task in a way that provides minimal opportunities for fraud and should require very little by way of new government bureaucracy.
It also manages to benefit homeowners in crisis without also rescuing the financial institutions that were speculating in mortgages gone bad. This will give the presidential candidates, and other members of Congress, a clear choice between helping distressed homeowners or bailing out financial institutions that should have known better.
You can learn more about this suggestion by going to Dean Baker's blog at the American Prospect website or to Andrew Samwick's blog. And here's a nice reference to the Morning Report discussion by Samwick.
Own-to-Rent on the Marketplace Morning Report
Economics correspondent Chris Farrell got the main points of the Own-to-Rent proposal across yesterday on Marketplace Morning Repot and added a bit of his own spice. From the transcript:
You know, the idea is out there. See there's a real problem with bailouts and let's just use the word bailout loosely all right? You don't want to reward speculators and you don't want to reward lenders. You really want them to suffer, you want that pain. They deserve to go to the seventh circle of hell anyway right? Now, but you do want to protect the homeowner that was misled. The benefit of this idea is that it's the most targeted idea I've seen that helps out that person, doesn't throw them out on the street, doesn't force them to go through foreclosure, and at the same time forces the lenders and the speculators to take a financial hit.
And I would add--the proposal does not force the taxpayer, whether directly through a government bailout or indirectly through greater involvement of Fannie Mae or Freddie Mac, to take a financial hit. This is what most makes it appealing to me, of all the different proposed interventions I have seen.
I would add, I hope this idea gains traction in Congress.