New Twists on Not So Old Themes

Fri, 16 Apr 2010 14:26:44 +0000

Felix Salmon posts the latest idea in alleviating the burden of foreclosures through options for current owners to become renters:

What happens when you cross right-to-rent with mortgage principal reductions, and turn the whole thing into an entirely voluntary private-sector program with no government involvement whatsoever? It might look a little bit like American Homeowner Preservation, a for-profit company which has a very interesting idea for keeping people in their homes.

The details can be found here: the core of the scheme is where AHP persuades a lender to accept a short sale on a home. That’s the principal-reduction bit; the right-to-rent bit then kicks in when the buyer of the home — an AHP client, along with the seller — agrees to rent back the home to the former owner at a low, affordable rate which can’t be more than one-third of the tenant’s income. Rent increases by 5% annually for five years; at any point, the tenant has the option to buy back the home at a predetermined price which rises year by year; tenants get financial counseling to enable them to do that.

The buyer can sell the home at any point in the first five years subject to the existing lease and option; after that, it’s put on the market and any profits over and above the option price get split equally between the buyer and the tenant.

If everything goes according to plan, the buyer makes healthy returns: here’s one financial projections sheet which foresees returns in the low double digits. And the homeowner ends up buying back their own home for much less than they originally bought it for. Meanwhile, AHP makes relatively modest fees of a few thousand dollars along the way.

I co-signed the original idea of Dean Baker's nearly three years ago.  If (and that for me is a big if) there is going to be a federal intervention to alleviate the burden on homeowners who can no longer afford their homes, the "own-to-rent" proposal is my preferred way of going.  When you get federal help, you shouldn't walk out with ownership rights.  But for the sake of neighborhoods and other reasons, there may be a social interest in not having too many vacant homes in a given area.  The own-to-rent proposal couldn't get much traction, though I have had a few inquiries from policy makers and Dean has certainly gotten many (see this press release for the latest). 

Perhaps this is not surprising, as own-to-rent imposed a burden on financial institutions that were already seeing the value of their assets fall (non-performing loans backed by collateral of declining value).  It worked by changing the status quo to strengthen the bargaining position of borrowers relative to lenders.  This new plan comes after we have seen years of what happens to these borrowers and lenders in its absence.  The presumption is that there are gains from trade if the borrower, lender, and potential investors can agree to on ways to divide those gains.