Why not protect the homeowner?

Submitted by Edward Harrison of Credit Writedowns.

This morning I was reading Simon Johnson’s excellent post “President Obama’s Regulatory Reforms Announcement: A Viewer’s Guide” about what Barack Obama should say when he makes his regulatory reform pitch today at 12:30 PM.  I agree with what he has to say about the need to re-assure us his ‘administration ‘gets it.’  And I suggest you read his commentary.  But, all the while I was reading it, I couldn’t help but think: ‘what about the homeowner?’

See, we have bailed out the financial services industry to the tune of nearly $14 trillion in guarantees and support according to the U.S. bank regulator the FDIC.  Yet, time and again we see differential treatment elsewhere.  Chrysler and GM were forced into bankruptcy and, more recently, California was denied aid.  The preponderance of evidence suggests that President Obama views the banking industry as systemically important in a way these other industries may not be.  The question is: how does he view homeowners, who collectively are American workers, taxpayers and voters?

I ask this because mortgage debt was the trigger for the financial crisis. And I have yet to see any comprehensive legislation protecting homeowners from financial distress, while we have certainly put the financial services industry and its reform front and center.  Just yesterday, in his “Ideas for fixing the economy,” Felix Salmon mentioned an idea first proposed in August 2007 by Dean Baker and Andrew Samwick which I will dub ‘rent-to-own.’ Baker and Samwick propose the following:

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.

Although the Baker-Samwick proposal does not specifically include a rent-to-own provision, whereby the renter has the option within a certain timeframe of buying back the house, it can easily be added.  Clearly this proposal has merits, yet I have heard nothing on this score for months except via Felix’s post.

I might add that there is also a huge amount of shadow inventory – repossessed houses not currently on the market due to the glut of residential housing inventory – which needs to be dealt with.  Calculated Risk has a sobering video from Jim the Realtor which makes this issue plain. This glut of inventory is likely to push house prices down lower, forcing many into negative equity and default.

So, my suggestion is that you should keep the homeowner in the back of your mind as you listen to President Obama make his case for banking regulatory reform.  I certainly want to see real reform, much as Simon does – and I will be listening for cues that we are going to get it.  However, I also think the time is right for homeowners to move center stage as well.

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This entry was posted in Banking industry, Real estate, Regulations and regulators, The destruction of the middle class on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. Neal

    ….The preponderance of evidence suggests that President Obama views the banking industry as systemically important in a way these other industries may not be….

    That's because the FIRE sector was to be the engine of the economy into the new century. The industrial sector is much diminished. Dotcom has come and gone. FIRE was the remaining hope.

    It worked for a while, based upon the non-exportable boom of real-estate, construction and odd-ball financial innovation. Now it is gone.

    Without some sort of new engine the economy will subside.

    Is it any wonder that Finance and Insurance are the focus of the efforts?

  2. Snacques

    "As a renter with secure tenure, the former homeowner would have incentive to do necessary maintenance and keep the home from falling into disrepair."

    Wait, why would they have an incentive? Is he saying someone would want to paint a house they don't own? Or is he saying they would be obligated to keep the house up?

  3. J.D. Swampfox

    Those American homeowners who do not also have a union card can jump in the lake as far as Obama is concerned

  4. GawainsGhost

    Well, the problem with this approach is that you're not dealing with homeowners. You're dealing with debtowners.

    This is axiomatic. You do not own the home free and clear until you pay off the note. Period.

    What we have in this country is a debt crisis. And for that there is plenty of blame to spread around. From the government to the Fed to the banks to the buyers, everyone is at fault.

    Some guy took out a loan he couldn't possibly pay off to buy a house he couldn't afford? Who is ultimately to blame for that? The lender? Yeah. The appraiser? Yeah. The realtor? Yeah. The buyer? Yeah. The government? Absolutely yeah.

    It is the responsibility of the government to protect the citizens from fraud. And at that our elected representatives have utterly failed for more than a decade.

    Anyone who thinks this crowd of clowns in office is going to do anything to aleviate this crisis doesn't have the brains that God gave a wombat.

    Vote against every incumbent. Indict and prosecute every individual that had anything to do with this mess. Seize assets, clawback salaries, send these guys to jail. Bankrupt the entire system.

    Only when the government of, for and by the people is restored will there be any freedom. Deriving their just powers from the consent of the governed may sound passe these days, but it's the only thing that works.

  5. Bob

    "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."

    What makes them think that the former mortgage holder could actually pay "fair rent" if they've been paying interest only (or less, in the case of option ARMS)? I would think that fair rent would be higher than those.

  6. Edward Harrison

    obviously these 'homeowners' having paid near zero percent down were never homeowners. Yes, they were debt-owners and many of them could legitimately be blamed for their predicament.

    However, that is largely irrelevant. What is more relevant is that there is a glut of inventory for sale and a bunch of people now being evicted (some trashing their houses on the way out).

    It would be positive for the U.S. economy if we could kill two birds with one stone – help banks finance their shadow inventory via rent by the dispossessed mortgage debtor and help the former homeowner in a difficult transition.

    At a minimum, I would like to see a proposal that addresses these real problems given all of the bank-oriented reforms now being discussed.

  7. Hugh

    I'm not sure if rent to own is viable in the sense that it is unclear if the renter/homeowner would ever actually be able to pay off the mortgage.

    Straight renting looks like a reasonable short to mid term alternative, which keeps families in homes and homes occupied.

    What is not being talked about here is cramdowns. For real relief for homeowners you need long term fixed rate mortgages at pre-bubble prices. This is where the real solution is to be found. This will not happen however because such pricing would expose the underlying insolvency of the banks, a fact which both the banks and the Administration have done everything in their power to hide.

  8. Koshem Bos

    The banks should have part of their hide in the mortgage of problematic homes. For example, why rent if the mortgage is cut in half? After all, despite the talk about stability, the banks are still burdened with huge overvalued mortgages.

    As foe the need for a strong financial sector for recovery. We can have a sound financial sector with Citi, BofA and Wells Fargo. We don't need half the banks we have.

  9. albie

    it sounds like another good plan to resolve the housing crisis. However, there are many good ideas "out there" that would support incremental relief for both homeowners, soon to be renters, and lenders, soon to be insolvent.

    We all know deep in our hearts, as much as we will deny the fact that the only solution to the housing problem is an orderly clearance of the excess inventory. The question is how do we define "orderly" in todays market. As we speak, that inventory is building, not declining, thus putting downward pressure on pricing across an entire spectrum of assets.

    It seems to me that the only asset that was left to inflate, "exploit", was the "good will" component, currently defined as "green shoots".

    The question that we need to ask ourselves is….

    What would a convincing and sustainable economic recovery look like…? I can not say…. However, I can tell you what one doesn't look like….

    Best regards,


  10. Tony Arko

    The worst thing that President Obama could do for his presidency is solve the housing problem. If he did that he would not be able to get his personal agenda approved by his adoring fans, National Health Care and Green Energy/Tech.

    As long as he can keep the housing crisis in place, the longer he can blame the previous administration, the longer he can keep the banks under his thumb, the longer he can work on the American people to accept his solution as the only way to get out of this recession.

    If a solution to housing is put into place and inventories go down and foreclosures stop and prices go up, than the economy will recover and Obama will no longer have the leverage he needs to get his pet projects passed into law and create a legacy.

  11. Kelli K

    I'm not impressed. First off, who determines "fair market rent" and based on what? Home prices are in flux and rent is whatever a landlord can get. The odds that you can afford a fair rent on a place you can't afford to make mortgage payments on is not high, so how does this keep families in their homes?

    Who pays the taxes (which are pushing many homeowners over the edge)?

    You don't solve the liquidity problem with this or get people closer to sustainable monthly expenditures. I'd rather they foreclose on me now.

    How's this for a simple solution: Short sale auctions in which current homeowners get to bid. A dutch auction would probably work best here–you get one bid, highest qualified bidder wins.

    When i first had this suggested to me I thought it was crazy, but a couple of months later I think it is the simple solution to many of our woes.

  12. skippy

    Moan and Groan, thats the limit. If your not one of the cogs or sprockets of the mighty Financial/Uberment Engines, get in the bread line, first come, first served. Hint, the domestication of animals strongest tool is food, so look cute, sit up and beg and you will be looked after for, if you shat upon their carpet of kindness you'll be put down or chained to the tree in the back yard, left to pine for days gone by, the masters warm touch, table scraps contently found under the table.

    skippy…wake up sheeple

  13. Bruce Krasting

    There is a certain segment of homeowners who would be happy to convert their ownership to rental. For those this proposal would be helpful.

    But you are missing the ball for the vast majority of folks who are underwater. They just want out.

    Half the people I help in these situations could not care less about the old house. It was a nightmare. People are banging on the door, the phone is ringing 24/7 and the mail is full of threatening letters.

    Many of these people want to move somewhere else to get a job or just blow town. We gave them a shot at ownership. It was a disaster, now there is no exit strategy available.

    We need, fast, taint free, deed in lieu of payment settlements for at least half of the busted homeowners out there.

    That can't happen because 60% of all mortgages are owed to the Feds. The banks are settling with people left and right. Any one with a Fannie and Freddie mortgage is just stuck.


  14. Sara

    The banks are settling with people left and right.

    I haven't seen this in my bankruptcy practice. The banks sit on top of loan modification paperwork until the foreclosure date, then foreclose anyway. Or they offer a loan mod with a higher payment than the homeowner was paying before, then foreclose.

    We do have a way out — bankruptcy. Every case I file is deleveraging the banks, drop by drop.

    I, too, am not impressed with the idea of having lenders determine fair market rent using "independent appraisers." Would these be the same people who determined the market value of these homes when the banks were making the loans in the first place? They know which side butters their bread.

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