Kevin Funnell at Bank Laywer’s Blog fulminates about an idea to deal with the burgeoning homeowner debt crisis, namely a proposal by House Representative Raúl M. Grijalva based on (but different in some key respects) from a Dean Baker proposal called “own to rent”.
While there are problems with the idea, there is more than a germ of something useful here, but Funnell resorts to harrumphing and class snobbery rather than deal with the plan substantively.
The House bill is worse than Baker’s suggestion. Baker wanted homeowners facing foreclosure to be offered the option of continuing as tenants as long as they want at a “fair market rate” as determined by appraisal. The shortfall of Baker’s proposal is that the tenant has an openended right to remain, and the rent adjustment is not to a “fair market” rate but based on local market inflation. Thus the proposal looks a great deal like rent stabilization in New York City. (We’ll return to why even that may not be as bad as that appears in due course).
The problem is that the bank-as-landlord now has no security. True, someone who bought a home and presumably fixed it up a bit (at a minimum curtains) won’t be as casual as a typical renter would be. I might tweak the proposal to give the tenant a somewhat better deal if they put up a one-month deposit over time, and had the lease renewals go to a true market rate rent, not inflation indexed from the base rent.
But as ideas go, this isn’t a bad one (and it turns out some conservative economists support it). The bank was going to wind up owning the property anyhow. This move saves them the considerable expense of foreclosure (reported to commonly be $50,000) and gets them cash flow right away. It saves them the hassle of disposal in a down market and the burden of certain aspects of property maintenance (the tenant will mow the lawn). It also prevents the specter, which is apparently happening in some neighborhoods, of empty properties creating an image of desperation (highly damaging to the sales process) and in some cases, squatters moving in.
It is also simpler than a mod (you offer the tenant the rental deal and it’s go or no go rather than having to see what you can do given the homeowner’s financial state). In areas with strong renter protection (like the communist city of New York) you might get them to agree in the rent agreement to accelerated eviction in the case they miss more than two or three rent payments (note in some places they can’t be waived but a lot of tenants won’t know that and will comply with an eviction notice).
Now how does the House bill screw this up? Ironically, the critics get bent out of shape with the rent control aspects, when the real fly in the ointment with the House version (as reported in Housing Wire) is that the homeowner has to have had his mortgage foreclosed. He can then petition the judge to stay.
Lovely. This is a lose-lose. The bank will have incurred all those foreclosure expenses, the now-former owner has to incur costs of his own to file to get the rental offer, and has had his already-bad credit record completely trashed by the foreclosure. And the indignities of the foreclosure process guarantees he will not have a good relationship with his new landlord. The original Baker process might leave the former owner feeling good that he was able to stay in his home and neighborhood; good will is likely to produce good behavior. Having the homeowner have to endure the foreclosure process to win the right to rent will assure acrimony and increase the odds of the property being trashed upon vacancy.
But what is Funnell’s main objection? Renters are bad for neighborhoods:
it’s not been my personal experience that “home renters” save a single family neighborhood; it’s “home owners” who do that. The value of emotional pride of “ownership” should not be underestimated, nor should the fact that ensuring that upkeep, maintenance and repairs are performed promptly as needed protects the owner’s monetary investment in the home. The worst neighbors I’ve had have been renters of single family homes situated in neighborhoods consisting primarily of owner-occupied houses.
Let’s look at the logic here, It’s “Ownership Society” plain and simple. Those who own homes are responsible and take good care of it; mere tenants are low-lifes and bad for property values.
And what’s the basis for his assertion? Funnell’s experience with some (perhaps as few as one) bad neighbors.
Gee, when I was growing up, we moved a lot. Once we had to rent because no suitable homes were available for purchase. And the home we rented was not only in a neighborhood of primarily owner-occupied homes, it was the best neighborhood in that town. And we didn’t undergo a behavior change and trash the house because we were tenants. In fact, my mother re-did the downstairs half bath and papered the walls in one of the bedrooms without a concession from the landlord (she did get approval).
I’ve been a tenant and homeowner myself, and have also been a landlord. I happen to live in New York where a lot of people rent. I have friends in other cities who are landlords of residential property as well as some who are tenants in precisely the same sort of neighborhood that Funnell claims are damaged by renters.
My observations (and yes, this is anecdotal):
1. I’ve never heard anyone complain about “they trashed the property” tenant problems or that they neglected routine care you’d expect of a tenant. Deposits are good insurance against that. (The big issue is that tenants are sometime late in payments, but from what I have heard, small commercial tenants are worse in that regard than residential).
2. I’ve rented my apartment furnished (my own stuff, which is very nice, while I was overseas). An now-ex friend did more damage staying there for two weeks than two tenants did in a two-year period.
3. People are house-proud whether they own or rent. Yes, a renter will focus his expenditures on things he will take with him, but people who are slovenly will live in a slovenly fashion whether they own or rent.
My other observation is that rent stabilization is not the disaster to property owners that opponents like to say it is. Yes, landlords don’t get the upside they would with market rents. so they do face an opportunity loss. But guess what? Give people property rights, and they act like they have property rights.
For instance, I know of two buildings in the area (Upper East Side on or near Park). One has quite a few rent stabilized apartments; the other has some rent controlled units (for rent control, the increases are more restricted than in rent stabilization). As long as the tenant is current on the rent in either setting, he is guaranteed a lease renewal (indeed, the tenancy rights can be passed to immediate family members).
Consider these examples: one tenant painted the entire apartment, re-did the floors, and put a new (fancy) refrigerator in the kitchen. One put in marble floors and new carpeting; another redid the wood floors, re-did the bath (including marble floors and tile), put in marble in the entryway and kitchen, put in new light fixtures, and re-did all the walls (paper or wall treatments). One re-did an entire three-bedroom apartment, which included entirely new kitchen with steel counters, new library (with built in wooden bookcases), new wooden herringbone flooring, new pocket doors with frosted glass (she reports the cost at over $1 million). Yes, these were all in rentals. I know other tenants in both buildings have made considerable improvements; I just don’t have the details.
True to what you’d expect with rent control or rent stabilization, the public spaces in these two buildings are pretty dreary. And in at least one of these buildings, I am told that the landlord makes no effort to decontrol the rent stabilized apartments (once the rent exceeds $2,000 a month, the landlord can attempt to destablize the apartment). In other words, the owner likes having established tenants who pay reliably even if he might in theory be able to extract more (and yes, this is an old New York landlord who owns a massive office building on Park midtown, plus other rental buildings, not a bleeding heart who inherited a building).
That suggests in other settings where tenants have strong protection of their property rights and know they have a deal, they too might (contrary to popular image) act in an owner-like fashion. They may not have the disposable income that Manhattanites do to throw money at the problem, but they might do more than one would anticipate via Home Depot and elbow grease (note that I am NOT advocating the rent control aspects of the Baker proposal, but am merely pointing out that some elements of the critique are overdone).
That is a very long winded way of saying be careful about casting aspersions on renters and renting.
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Well, if owners are so much better than renters in the governments eyes, then why not give everyone a free house and make them an owner?
I don’t take the fruitcake House proposal at its face, and Funnell’s huffing against ‘those people’ is, shall we say unhelpful. Taking Baker’s now widely disseminated base concept, I would like for this to work, but I’m highly skeptical. To begin with, many of these mortgages are _not_ owned by banks, they are held by amorphous security trusts who don’t have a common per-security consensus on what they want going forward except 1) they didn’t buy their tranch to become a landlord with maintenance and tax costs and responsibilities, and 2) they won’t be happy with the fractional revenue stream offered them in rent. These deed-in-lieus will be resold as soon as possible to other parties who may or may not have any interest in being landlords, who will have no relationship of any kind with present occupants, but who may have a keen interest in getting down the road market value for the properties whose deeds they now hold. That is a clear recipie for very sour relations between involuntary renters and uncommitted landlords. Who are locked together in perpetuity. I see a lot of these situations ending up in court down the road.
To me, the value of Baker’s idea is in the short term. Foreclosure costs are obviated. Properties are kept off a very bad and supersaturated housing market for now. Born again renters have somewhere to live, at a price they can afford, with their credit in a recoverable position. So let’s keep the good part and drop the bad part: perpetual standing. For doing the deed-in-lieu, renters get a lock in at an affordable rent for a base period, say (pick a number) five years; long enough for the housing market to find its clearing and real price levels, and for the occupant’s credit to get itself together. At that point, the occupant has the right in this model to take a new mortgage on the property at the present market value (appraised in some specified fashion fair to both parties) if they can finance it and wish to. If not, the rent steadily climbs in yearly increments for a set period of time, say three years, after which the then deed holder can put the property up for sale. By this approach, there is an ultimate exit strategy for whoever ends up holding the deed, a fair set of outcomes for the drowning present homeowner, and a way of clearing the market.
I am a fan of rent stabilization, and we should have it in most urban areas. Getting it by forcing deeds back down the craw of involuntary landlords is setting the idea up to fail—and big money will ensure that it does in time.
@Richard – Why don’t you run for Congress? We need people who can use their brains there.
The right-wing factotum Funnel begins his spew with this: “Whenever pressure is applied to fragile minds, those minds tend to bend.”
So true. And when was it that Funnel’s fragile mind first felt the pressures of Ayn Rand, Milton Friedman, Grover Norquist, Karl Rove, Antonin Scalia and the rest of the cabal who hate America?
This, though, may have been quite a while ago. Now, apparently, the mind evidenced in this post is pickled and embalmed and no longer capable of bending or even, shall we say, oxygenating.
That doesn’t, though, keep the nerve endings from spasmodic eruptions that accuse others of being ‘loons’ while the poster offers Pavlovian squawks and squeals in the darkness.
A mind is a terrible thing to waste. It’s even worse when that mind is colonized and spews nothing but drivel.
In my vast experience, the worst neighbors are people in glutted, economically insecure trades such as law who put too much of their money into foolish property investments and then, when the housing market tanks, take their status anxieties out on the people around them. Innumeracy and financial retardation make them think that peeling paint has caused the 25% drop in their derisory net worth, so they fall back on what they know and sue everyone in sight.
“But as ideas go, this isn’t a bad one…This move saves them the considerable expense of foreclosure…gets them cash flow right away. It saves them the hassle of disposal in a down market and the burden of certain aspects of property maintenance…”
Fair enough. You make it obvious that it just makes so much more sense for the bank to enter into this alternative arangement
But if it is the case that a swap of a Deed for a Lease is the best course, then why do we need an H.R. Bill? Does it take an act of Congress in order to get a bank to act in its own best interest?
An interesting idea. However, banks have no desire to hold REOs and be in the landlord business. And as Richard Kline points out, most mortgages aren’t even owned by banks, they’re owned in securitized pools by institutional investors who have even less desire to be in the landlord business than banks.
“The problem is that the bank-as-landlord now has no security. True, someone who bought a home and presumably fixed it up a bit (at a minimum curtains) won’t be as casual as a typical renter would be.”
I think this is a non-argument as the bank is in trouble in the first place because they had no security.
I think people would stay and rent if given the option and that would truly reduce the level of bleeding for the bank. And I also think that people that truly had the homeowner dream would treat the home with more respect than a typical renter.
There are many solutions to the foreclosure problems facing this country, in most cases, it’s just plain old foreclosure, seizure and auctioning off the property(s). The real property asset class, has lost all sense of equilibrium and needs to find it’s way back. There is no panacea. Own to rent may be a great option for many, however, for most, it will be impractical and unaffordable.
When it’s all said and done we are all renters.
Econolicious
Yves, maybe you should talk with some major multifamily operators. I’ve done so with my prior employer, and destruction of property by renters is far worse today than it was 5, 10 or 30 years ago.
One small bit of proof, many landlords are now requiring renters insurance, often in the place of a refundable deposit. My guess is that will become standard practice.
So Jojo, I have five books to write, any one of which would mean more to me than anything except ‘World Peace,’ which as a Congressfactor I’d have precious little influence upon. So as an alternative, I’m up on my soapbox here honking out a megaphone; the sometime Quaker and one time activist in me gives me a kick in the rear to ‘do the right thing for society in a bad hour,’ or something. Anyone—left, right, or hyperbolic (it’s actually a 3-D political space)—who likes anything they hear is more than welcome to take it as their own and run with it.
. . . I’d rather write poetry.
Yves,
I would invite your blog readers to visit http://www.SwapRent.com and share with us some feedback. Thanks.
You misstated my observation about about renters as my “main objection” when it wasn’t, and I admitted that the contention was debatable. Way to set up a straw man and knock it down. But if you’re going to dis me, the least you could do is to get my name right, Chives.
Kevin,
Apologies re your first name. I am very bad at proofreading, particularly as regards names.
As to mischaracterizing your post, it has four paragraphs of your text (excluding the quotes that describe the proposal) that attack the proposal in non-specific ways (in this day of various proposed interventions, I don’t see the issue of “it interferes with property rights” as sufficient without some detail as to how the property right holder is damaged) before getting to your specific complaint. The section I quote is when you finally get specific in your objections. Hence, “fulminates”.
Then we have another paragraph in which you question the loyalties, in dripping with contempt tones, those economists in the conservative camp who support the concept.
This was the only other substantive objection I can find:
It’s bad enough when state and local governments, our “laboratories” of “progressive” social experimentation, start screwing around with the free market and end up screwing the pooch by reason of the operation of the laws of unintended consequences and of human nature.
Given that free markets got us into a situation that has precipitated the worst financial crisis since the Great Depression, and said free markets (which I have discussed elsewhere at length is actually an internally inconsistent construct) are not delivering any remedies (oh, and that government you so detest has had to intervene to prevent a systemic financial collapse, an inconvenient fact you fail to acknowledge), I don’t see how my post can be labelled “dissing.” That implies an ad honimen attack. Calling your diatribe against renters “class snobbery” is not an inaccurate characterization.
But as your post illustrates, you seem happy to dish ad hominen attacks out. Projection, perhaps?
David Merkel,
Is that in the case of eviction (when they also would have gotten the value of the deposit back by virtue of non-payment of a month or more or rent) or in general?
dan duncan,
There is a problem (as Kline and others mention) that the servicers feel or are constrained by the securitization agreements in making changes, and a lot of mortgages are tied up in those vehicles. Personally, I wonder how much of this is really due to legal issues, as opposed to servicers not being set up to do this sort of thing (while banks in communities can be more flexible) but that issue in the end is probably of little import.
Thus acts of Congress (or government sponsored plans like the Hope Now Alliance) appear necessary to give them the needed cover.
I agree banks don’t want to be in the property ownership business. But that behavioral bias is costing them money in this environment. With so much overhang, property management seems inevitable. Maybe there is a way to make lemons into lemonade.
Old real estate hands tell me banks would often do deed in lieu of foreclosure (that was the grown-up. polite, bank initiated version of jingle mail).
Re: Rent Control in NY is okay.
Well maybe. I know someone who inherited a Soho tenement apartment (separate bathroom down the hall) from his parents. His rent was under $700. He was going to school and subletting it illegally — Hey, I probably would have gone for the easy money too.
In the end the landlord resorted to petty harassment (no gas for a few months, etc.)
So I would say Baker’s rent control policy is best limited to a period of 5 years or maximum 10.
Anon of 4:59 PM,
First, I very clearly said I was not advocating the rent control aspects of Baker’s plan; I’d prefer they pay market rent. If they do so at the outset, I don’t see why they can’t be asked to later.
Second, the action of the rent controlled tenant you describe are illegal on two counts. First, it is illegal to sublet ANY rental in New York without landlord approval (although landlords are also required not to unreasonably withhold such approval). Second, charging more than you are paying in rent is clearly illegal. It not only means that the landlord can terminate the lease, but I believe he can also pursue the now former tenant for the overcharges.
Indeed, in New York, even charging a roommate more than his pro-rata share of the rent is illegal and ground for lease termination.
The landlord was not very competent if he had to resort to petty harrassment to get rid of the lawbreaking tenant, It isn’t hard to establish that an illegal subtenant is in residence. It sounds like a matched pair: a tenant and landlord who couldn’t be bothered to adhere to the law.
Saying that illegal acts happen under rent control laws means rent control is a bad idea is like saying that the fact that people drive drunk means drinking should be abolished.
JoJo said We need people who can use their brains there [government]
But once they get there, can you trust them anymore? They’d be in power AND intelligent: lethal combination!
However, I’d pay higher taxes if Yves, Sester and some of the commenters here could run the Fed. Hell, I might even sell short EUR/USD.
Let me explain a bit. Why would a bank trash its mortgage, incur lots of expenses and troubles to foreclose a property only to get stuck with the foreclosed property to become a landlord to the irresponsible borrower when it could simply leave its existing mortgage intact, give the homeowner in need a fair monthly subsidy and become a temporary “economic landlord” through a simple SwapRent (SM) transaction? The bank could subsequently transfer this real estate exposure through the SwapRent (SM) contract to some other investors much easier and cheaper than trying to sell the actually foreclosed property. This is a new consumer finance concept we introduced years ago as “economic renting” of a property while letting the homeowner continue to keep the legal title ownership. For more details please review the research info at http://www.SwapRent.com . Further comments would be appreciated. Thanks.