Lenders into landlords?
Economist Dean Baker with the Center for Economic and Policy Research says such a move will help keep vacant homes from piling up on the housing market and dragging down neighborhoods. His "right to rent" proposal suggests that homeowners-turned-tenants be guaranteed the option to stay in their homes for a "substantial" time, such as five to 10 years, as long as they pay market rent.
Many borrowers would have an easier time paying rent than a mortgage, Baker says, because rents are significantly lower than the ownership costs of the typical home purchased in many markets in 2006 and 2007. In the Baltimore metro area, he says, the monthly fair-market rent is $1,037 for a two-bedroom unit while the monthly ownership cost for a starter home is $1,666.
(The fair-market rent figure comes from HUD. Baker is calculating ownership costs by assuming that a home equivalent to a two-bedroom rental will be valued at 75 percent of the median home, and he's including property taxes, insurance and maintenance costs along with principal and interest. He assumes a 6 percent interest rate.)
The $629-a-month savings he calculates for struggling Baltimore-area homeowners becoming renters is more than some markets, like Cleveland ($126) and Philadelphia ($274). But it's less than pricey places like New York and Washington (both more than $1,000).
But what about the tax benefits of homeownership? He says owner-to-renter savings would dip to $475 a month in the Baltimore metro area if you take that into account, assuming a 25 percent income tax bracket.
Baker, who co-authored the July report with Hye Jin Rho, writes:
During ordinary years, homeowners would not gain much from having a right to rent, since the gap between ownership costs and rental costs is usually not very large. However, because of the run-up in house prices during the housing bubble years, ownership costs vastly exceeded rental costs in many bubble markets. ... Right to Rent offers the advantage that it could immediately benefit all homeowners facing foreclosure without any bureaucracy and would require no taxpayer dollars.
What do you think of this proposal? Does it make financial sense for a lender to turn landlord rather than home seller -- and would homeowners be willing to become renters to avoid a forced move?