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July 29, 2009

Lenders into landlords?

As the feds press lenders to avert foreclosures by modifying more mortgages, an economist at a Washington think tank has been advocating a different solution: Let the borrowers stay in their homes -- as renters.

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?

Posted by Jamie Smith Hopkins at 7:00 AM | | Comments (8)
Categories: Renting, The foreclosure mess


The tax deduction is false and at best misleading. Itemized deductions are only beneficial when they exceed standard deductions, More importantly, it assumes you won't change any other tax saving strategies to afford a house.

A lot of homeowners mistakenly think they get tax benefits when they actually don't, or are just replacing another--more long-term--tax deduction like a 401k with a house-payment and end up poorer in the long run.

Back me up Mr. Darwin. You must get tired of hearing that tripe.

Let the borrowers stay in their homes -- as renters is reasonable (in many cases) but the idea of making the bank their LL is just asking for trouble.

Lenders need to just get out of their own way. Take the hit once and be done with it already.

Allow actual experienced LL's to have more mortgages (maybe a LOT more mortgages) than the current rules allow. With these experienced RE pro's in place the properties are more likely to appreciate or at the very least... to remain stable

(For the pedants: maintain L:V and income ratios etc blah blah)

Allowing foreclosed on homeowners who can pay a fair market rent to stay in the home and perhaps repurchase in 3 years makes a lot of sense. The tax deduction is a myth that got us in some of the trouble we are in. Some folks don't even benefit from it--it is a deduction based on the amount of mortgage interest paid for that year. People were told renting was wasteful and were shamed into buying unaffordable homes. For many, renting is appropriate and economical. Also, by allowing the former homeowners to rent, avoids moving costs and the house does not fall into disrepair or abandonment, thus benefiting the consumer, lender, government agencies and the community.

Hi, folks -- re: tax savings from homeownership, I think Baker was trying to make the point that renting is less costly per month even for recent buyers who are seeing a deduction benefit. Given the underlying assumptions noted above, of course.

I'm imagining that the administrative costs and time of managing properties is probably not what lenders are looking for. I don't think they have the capability to become landlords. However, if it means a decrease in foreclosures and the costs associated with that, they may be open to the idea. Plus, fewer foreclosures are good for everyone. It's a pretty huge undertaking if you think about it though. If something goes wrong with the house; roof leak, furnace issues, plumbing, etc, they are going to have to deal with all that mess.

@M: uh huh!

Anyone who would even consider going into such a touchy feely and materially hands on business as residential real estate landlord who otherwise wants to work "bankers hours" is in for a very rude awakening.

Even with (a good!) property management contractor) to handle the nitty gritty (and btw there are really very few of the good ones at all let alone those who can ramp up to take on a such a load) at the very best all you can do is spread the (still inevitable) foreclosures over a few years.

This is a valid rationale but that isn't what the article says is going on... is it?

I think something else needs discussion before this topic can even be addressed. The lenders themselves are so overwhelmed they really should be required to hire more people. When they're reporting record profits there absolutely is no excuse for a short sale, mortgage modification, or other transaction to take half a year or longer. Pressuring lenders to offer rental options is just going to add more of a burden to firms that can't even seem to be able to handle what's already on their plates. Renting is not without many pitfalls for the landlord...things banks are more than willing to ignore that can affect the tenants, community, and property values of the area.

BD I wasn't intending to make it but I somewhat addressed your point.

By slowing everything down... let the Smiths and the Jones families stay put and well reassess in a year or so... the lenders could perhaps manage with the staff they have (or a smaller contracted hiring) to sort through the mess.

On the old 80/20 rule basis if 80% of the problem loans can maintain then the staff can focus on the 20% that really warrant attention.

The lenders also have enough market strength to "force a bottom" by the measure too. Like it where it is or not.

LOL Who are we kidding! They won't commit to either choice any better than they have in the past. I think they may like the turmoil.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie

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