The Foreclosure Plan Du Jour

Just when you thought the Obama administration was out of crazy ideas to solve the housing crisis they come up with another one. This one is cleverly labeled by Clusterstock as Own-To-Rent.

As Reuters reports, the idea is to let owners facing eviction stay in their homes as renters:

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans, tapping an unused portion of a $50 billion housing aid kitty.

As part of this plan, jobless borrowers might receive a housing stipend along with regular unemployment benefits, the sources said.

Let’s take a look at everything that’s wrong with this.

First off, I suspect that more than a few of the investors that own these mortgages might not be thrilled to see their contractual rights to foreclose on the property and dispose of it are going to be real happy to learn they’ve just been turned into long term investors in real property. They probably just want to get whatever is left over from a bad investment and lick their wounds for awhile. Instead, the government is going to make them stay in the game.

Next, who is going to manage all of this property. The banks and loan servicing companies are set up to deal with paper not houses. By all accounts they have been swamped just trying to repossess and dispose of the properties. Lord knows how they’ll cope with several million tenants calling about stopped up toilets let alone collecting the rents.

What laws are going to govern these rental arrangements. Each state has its own landlord-tenant statutes and they tend to be relatively complex though definitely not uniform from state to state. There is no comparable federal set of statutes. I suppose you could say facilely that the laws of the state in which the property is sited will prevail but that will get carved up in short order by the lawyers. The press will be shouting where’s the fairness as soon as they realize that an evicted family in Phoenix is on the streets in twenty days while it takes three months in Los Angeles.

Naturally, this is going to do nothing so much as freeze the housing market. Presumably, these sweetheart leases have some maturity which will represent a natural overhang on the market. Rather than clearing the market and getting foreclosed homes through the banks and back into private hands, buyers are going to have to factor in millions of homes that will at some point come flooding back into the resale pool.

Finally, how about some help for renters. Why is the guy or gal that had the good sense to stay out of the housing market when it was bubbling and loses his or her job being discriminated against. They need some place to live as well and if they find themselves in financial difficulty are certainly no less deserving of the same help that is extended to a former homeowner.

The whole idea is one of those feel good attempts at policy that slosh around Washington these days. The problem is that there’s always the possibility that it goes somewhere before anyone sits down and analyzes the potential defects or that Congress gets it in their teeth and disregards any defects.

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