Kevin Funnell at Bank Laywer’s Blog fulminates about an idea to deal with the burgeoning homeowner debt crisis, namely a proposal by House Representative Raúl M. Grijalva based on (but different in some key respects) from a Dean Baker proposal called “own to rent”.
While there are problems with the idea, there is more than a germ of something useful here, but Funnell resorts to harrumphing and class snobbery rather than deal with the plan substantively.
The House bill is worse than Baker’s suggestion. Baker wanted homeowners facing foreclosure to be offered the option of continuing as tenants as long as they want at a “fair market rate” as determined by appraisal. The shortfall of Baker’s proposal is that the tenant has an openended right to remain, and the rent adjustment is not to a “fair market” rate but based on local market inflation. Thus the proposal looks a great deal like rent stabilization in New York City. (We’ll return to why even that may not be as bad as that appears in due course).
The problem is that the bank-as-landlord now has no security. True, someone who bought a home and presumably fixed it up a bit (at a minimum curtains) won’t be as casual as a typical renter would be. I might tweak the proposal to give the tenant a somewhat better deal if they put up a one-month deposit over time, and had the lease renewals go to a true market rate rent, not inflation indexed from the base rent.
But as ideas go, this isn’t a bad one (and it turns out some conservative economists support it). The bank was going to wind up owning the property anyhow. This move saves them the considerable expense of foreclosure (reported to commonly be $50,000) and gets them cash flow right away. It saves them the hassle of disposal in a down market and the burden of certain aspects of property maintenance (the tenant will mow the lawn). It also prevents the specter, which is apparently happening in some neighborhoods, of empty properties creating an image of desperation (highly damaging to the sales process) and in some cases, squatters moving in.
It is also simpler than a mod (you offer the tenant the rental deal and it’s go or no go rather than having to see what you can do given the homeowner’s financial state). In areas with strong renter protection (like the communist city of New York) you might get them to agree in the rent agreement to accelerated eviction in the case they miss more than two or three rent payments (note in some places they can’t be waived but a lot of tenants won’t know that and will comply with an eviction notice).
Now how does the House bill screw this up? Ironically, the critics get bent out of shape with the rent control aspects, when the real fly in the ointment with the House version (as reported in Housing Wire) is that the homeowner has to have had his mortgage foreclosed. He can then petition the judge to stay.
Lovely. This is a lose-lose. The bank will have incurred all those foreclosure expenses, the now-former owner has to incur costs of his own to file to get the rental offer, and has had his already-bad credit record completely trashed by the foreclosure. And the indignities of the foreclosure process guarantees he will not have a good relationship with his new landlord. The original Baker process might leave the former owner feeling good that he was able to stay in his home and neighborhood; good will is likely to produce good behavior. Having the homeowner have to endure the foreclosure process to win the right to rent will assure acrimony and increase the odds of the property being trashed upon vacancy.
But what is Funnell’s main objection? Renters are bad for neighborhoods:
it’s not been my personal experience that “home renters” save a single family neighborhood; it’s “home owners” who do that. The value of emotional pride of “ownership” should not be underestimated, nor should the fact that ensuring that upkeep, maintenance and repairs are performed promptly as needed protects the owner’s monetary investment in the home. The worst neighbors I’ve had have been renters of single family homes situated in neighborhoods consisting primarily of owner-occupied houses.
Let’s look at the logic here, It’s “Ownership Society” plain and simple. Those who own homes are responsible and take good care of it; mere tenants are low-lifes and bad for property values.
And what’s the basis for his assertion? Funnell’s experience with some (perhaps as few as one) bad neighbors.
Gee, when I was growing up, we moved a lot. Once we had to rent because no suitable homes were available for purchase. And the home we rented was not only in a neighborhood of primarily owner-occupied homes, it was the best neighborhood in that town. And we didn’t undergo a behavior change and trash the house because we were tenants. In fact, my mother re-did the downstairs half bath and papered the walls in one of the bedrooms without a concession from the landlord (she did get approval).
I’ve been a tenant and homeowner myself, and have also been a landlord. I happen to live in New York where a lot of people rent. I have friends in other cities who are landlords of residential property as well as some who are tenants in precisely the same sort of neighborhood that Funnell claims are damaged by renters.
My observations (and yes, this is anecdotal):
1. I’ve never heard anyone complain about “they trashed the property” tenant problems or that they neglected routine care you’d expect of a tenant. Deposits are good insurance against that. (The big issue is that tenants are sometime late in payments, but from what I have heard, small commercial tenants are worse in that regard than residential).
2. I’ve rented my apartment furnished (my own stuff, which is very nice, while I was overseas). An now-ex friend did more damage staying there for two weeks than two tenants did in a two-year period.
3. People are house-proud whether they own or rent. Yes, a renter will focus his expenditures on things he will take with him, but people who are slovenly will live in a slovenly fashion whether they own or rent.
My other observation is that rent stabilization is not the disaster to property owners that opponents like to say it is. Yes, landlords don’t get the upside they would with market rents. so they do face an opportunity loss. But guess what? Give people property rights, and they act like they have property rights.
For instance, I know of two buildings in the area (Upper East Side on or near Park). One has quite a few rent stabilized apartments; the other has some rent controlled units (for rent control, the increases are more restricted than in rent stabilization). As long as the tenant is current on the rent in either setting, he is guaranteed a lease renewal (indeed, the tenancy rights can be passed to immediate family members).
Consider these examples: one tenant painted the entire apartment, re-did the floors, and put a new (fancy) refrigerator in the kitchen. One put in marble floors and new carpeting; another redid the wood floors, re-did the bath (including marble floors and tile), put in marble in the entryway and kitchen, put in new light fixtures, and re-did all the walls (paper or wall treatments). One re-did an entire three-bedroom apartment, which included entirely new kitchen with steel counters, new library (with built in wooden bookcases), new wooden herringbone flooring, new pocket doors with frosted glass (she reports the cost at over $1 million). Yes, these were all in rentals. I know other tenants in both buildings have made considerable improvements; I just don’t have the details.
True to what you’d expect with rent control or rent stabilization, the public spaces in these two buildings are pretty dreary. And in at least one of these buildings, I am told that the landlord makes no effort to decontrol the rent stabilized apartments (once the rent exceeds $2,000 a month, the landlord can attempt to destablize the apartment). In other words, the owner likes having established tenants who pay reliably even if he might in theory be able to extract more (and yes, this is an old New York landlord who owns a massive office building on Park midtown, plus other rental buildings, not a bleeding heart who inherited a building).
That suggests in other settings where tenants have strong protection of their property rights and know they have a deal, they too might (contrary to popular image) act in an owner-like fashion. They may not have the disposable income that Manhattanites do to throw money at the problem, but they might do more than one would anticipate via Home Depot and elbow grease (note that I am NOT advocating the rent control aspects of the Baker proposal, but am merely pointing out that some elements of the critique are overdone).
That is a very long winded way of saying be careful about casting aspersions on renters and renting.