Washington Finally Proposes Real Help to Deal with Foreclosures

By L. Randall Wray

The Washington Post reported on Friday that Washington is finally considering meaningful steps to deal with the on-going foreclosure crisis. The article reports:

“A top Treasury Department official told a Senate panel yesterday that the government is considering a proposal to allow homeowners to stay in their home as renters after a foreclosure.”

The administration appears to be conceding that all of its proposals to date have been complete flops. The report goes on:

“Under the federal program known as Making Home Affordable, lenders are paid to lower borrowers’ mortgage payments. About 160,000 loans have been modified into lower-cost loans so far. The administration has said the federal effort has already been more successful than previous programs.”

That program was designed by the lenders, who wanted yet another government hand-out. But it was doomed to fail because mortgages that have been packaged into complex securities cannot be modified easily. If, instead, the government had directed aid to homeowners from the very beginning, it could have slowed the downward spiral of real estate markets. Reports yesterday put the number of foreclosures this year at another 2 million, with similar projections for next year. What is needed now is relief for the millions of families who have lost, or will soon lose, their homes.

Allowing families to stay on as renters after a foreclosure is a step in the right direction. However, the government should go further by following the plan put forward by Warren Mosler, as I summarized previously:

When banks begin to foreclose, the government would step in to purchase the property at the lower of market price or outstanding mortgage balance. Establishing market price in a glut is not simple, but it is not impossible. Mosler proposes that the federal government would rent homes back to the dispossessed owners (Dean Baker has a similar plan) for a specified period (perhaps two years) at fair market rent. At the end of that period, the government would sell the home, with the occupant having the right of first refusal to buy it. Reducing evictions by offering a rental alternative will help reduce the pain of foreclosure. It might also allow the process to speed up (with smaller losses for banks) since many families would choose to stay-on as renters, with the possibility that they could later buy their homes at more reasonable prices.

7 responses to “Washington Finally Proposes Real Help to Deal with Foreclosures

  1. Yes, there should be relief for homeowners. They should be relieved of their houses and given some good advice about financial prudence. Everyone cries out loud when gas prices go up; but nobody complains when house prices go up. They don't realise that both gas and house are expenses.

  2. How would a delay of two years help homeowners or the housing market? A homeowner foreclosed upon can rent immediately — some other house, of which there is now ample supply. Is the burden of moving so great that we have to get the government involved?Your implicit assumption is that, by avoiding foreclosure sales, the housing market will recover. Not so. Recovery in the housing market depends on achieving housing affordability. Housing affordability comes with lower prices, which can only occur with more supply. Restrict foreclosure supply and you prop up prices, which of course just delays the market's recovery.You may respond that the government is buying out the house at CURRENT prices. Fine, but the buyer of the home has non-economic considerations. Specifically, the rental yield required by the government as a would-be landlord may be above the rental yield required by private landlords. Again, the government's intervention as an investor/landlord merely helps prop up prices above clearing levels.What interest does the government have in proping up housing prices? Only one — that of banks and investors that own these mortgages. Homeowners can rent other homes; new home buyers would benefit from lower prices. Neither of them receives much benefit from this plan.

  3. Sorry — I meant the government may require a LOWER rental yield than the private sector. BTW, as a California resident who rents, I can tell you the best thing that ever happened to the California housing market is foreclosures. Prices are down 40%. At last, a white collar worker with a median income can begin to afford to buy a house without becoming a debt slave. I am shopping for a house after years of refusing to buy a home I couldn't afford. This is bad because…? Please remember that most homeowners own a put on the value of their homes. This is a valuable asset. They can sell the home to the mortgage holder the minute the value falls below the value of their debt, thereby extinguishing the loan. Sure, there are cases where the foreclosed-upon have lost their life savings (most likely they have only lost unrealized capital gains). But your proposal does nothing to ameliorate that problem.The principle victim of falling home prices is the banking system. I don't really feel sorry for Goldman Sachs right now. Why do you?

  4. The only logial and fair way for housing is to let prices fall to market values.If they overshoot on the way down, so be it. It is unfair on the taxpayers to prop up home values in the long run. Imagine if you could buy a 3 bedroom home for 50k in a nice neighborhood. You would have so much money left over to spend on your children, to spend on your own education and improvement, to spend on health insurance, to spend maybe to start a business. Instead, the national mania seems to be to let house prices stay at artificially high levels; so that all your net worth is tied up in an unproductive asset (your home). Instead of people thinking about maybe starting a business, they think about what granite countertop to buy to maximise the home price. I say lets aim for lower home prices (affordable home prices) so that this national fixation with real estate is replaced by something else where it is more productive. So that instead of TV programs like "Flip that house", we may watch "How to start your own business".

  5. Some readers need to get out more. Drive around. Look at the foreclosed houses. They are not rented–they are vacant. And the foreclosed people don't smoothly transition into a rental–they may not have 1st and last month's rent plus deposit, plus a sterling credit history. Instead, they live in cars or on the couch of a friend. And I did not say this plan will be enough to stop house prices from falling–nor should it. However, it does ensure there is a buyer for foreclosed houses–the government. That will help cushion the downward spiral and MAYBE prevent overshooting too severely. LR Wray

  6. San Diego is quickly converting homes into rentals through the foreclosure process. Bank-owned homes sold at cheap (fair) prices receive multiple offers from would-be landlords. They are enticed by the fat rental yields, and these are a product of — you guessed it — lower home prices.The vacant homes you see are there because the lenders are dragging their feet on foreclosure. This typically occurs because the lenders are waiting for a better deal — from the government, and as a result of proposals such as yours. So, ironically, you are responsible for delaying rental inventory.Finally, there is a simple solution to the security deposit issue. Just have HUD/FHA guarantee three months rent for any foreclosed home owner. This would be far, far cheaper than your proposal. Ironically, again, it would not benefit lenders. So let's see — your plan primarily benefits lenders by propping up (or cushioning, as would have it) house prices, mine primarily benefits renters by ensuring they don't sleep in their cars, and taxpayers by keeping the cost down. Which is better?

  7. BTW, find me a landlord that will turn down a previous home-owner because of a foreclosure on an otherwise-clean credit report. Landlords would love to have someone that has already been responsible for their own property. I would be surprised if this pool of renters is were not seen in a better light than the broader universe.Also, I know people that have lost their homes in San Diego. Not a one is sleeping in their car. These people are not income-poor, they just took on more debt than they could pay. They can afford shelter as long as they have a job. The unemployed are a different story, of course.