Stopping Foreclosures with the Right to Rent: One More Time
by Dean Baker
POLITICIANS OFTEN prefer complex solutions to simple problems.
Nowhere is this more apparent than with the long list of complicated
and convoluted proposals to address the country's foreclosure crisis.
Millions of people face the loss of their homes over the next few
years. While the politicians in Congress have developed a wide variety
of complex schemes in order to hold back this flood of foreclosures,
including one passed into law last summer that provided up to $300
billion guarantees for new mortgages on homes facing foreclosure, none
have had much impact thus far.
The unavoidable problem with these schemes is that it is difficult
to design a plan that aids families facing foreclosure without giving
an incentive to other homeowners to also default on their mortgage. In
addition, it is hard to justify taxing the people who are struggling
to keep up with their own mortgages in order to help those who
default. It is even harder to justify taxing ordinary people to help
out the bank executives, who issued hundreds of billions of dollars of
As a result, to date these programs have not prevented a tidal
wave of foreclosures and evictions. The number of foreclosure filings
(there are typically two or more filing for every actual foreclosure)
is now approaching 300,000 per month.
For those not offended by simplicity, there is an easy solution.
Congress can temporarily modify the rules on foreclosure to give
families facing foreclosure the right to rent their homes at the
market rate for a substantial period of time. Rep. Raul Grijalva
proposed such a change in the Saving Family Homes Act, which would
allow homeowners the option to remain as renters for up to 20 years
following a foreclosure.
This bill would immediately give families security in their home,
so that if they like the home, the neighborhood, the school for their
kids, they would have the option to stay in the house for a
substantial period of time. This also has the great benefit for the
neighborhood that homes will remain occupied.
Perhaps more importantly, this change in foreclosure rules will
give banks a real incentive to negotiate conditions under which
homeowners can stay in their homes as owners. Banks do not want to
become landlords. The bank will own the house after a foreclosure, but
a house with a renter is worth much less to them than a house over
which it has complete control.
Giving the homeowner the right to stay as a renter hugely
increases their bargaining power with the bank. The result of this
change in foreclosure rules is that far more homeowners are likely to
remain in their homes as owners.
The beauty of this sort of proposal is that it is simple, can take
effect immediately, it requires no taxpayer dollars and no new
bureaucracy. It also is not giving anyone a big bonanza. Homeowners
are not likely to line up for a process that could end up with them
being renters. And the banks will obviously not be thrilled about a
rule change that will leave them worse off in trying to squeeze money
out of homeowners.
While the basic point of the right to rent is simple, it can be
extended in various ways to further aid homeowners. Bernard Wasow, at
the Century Foundation, has proposed some additional measures to
facilitate the transition to rental status or possibly a return to
ownership. Daniel Alpert, of Westwood Capital, has a somewhat
different version that creates a mechanism for homeowners to buy back
their homes after five years.
In short, if people want to add bells and whistles, it is easy to
do so. But, the key to stopping people from being thrown out of their
homes is simply to change the law that allows people to be thrown out
of their homes. That one is so simple that even a policy wonk should
be able to understand it.
Dean Baker is the co-director of the Center for Economic and Policy