If you're a homeowner, what would a rent bill have to do with you? It just might make your mortgage more affordable and support your property's value. Here's how.
The Right to Rent Act of 2010 (R2R), making its way through Congress, is the brainchild of economist Dean Baker, co-director of the Center for Economic and Policy Research, and it has been endorsed by experts both liberal and conservative. R2R was sponsored by Representatives Raul Grijalva of Arizona and Marcy Kaptur of Ohio. It would allow homeowners who lose their properties to foreclosure the option of staying in their homes as renters for as long as five years. Baker says, "This is something Congress could in principle do and immediately help hundreds of thousands -- if not millions -- of people who are facing foreclosure. And it doesn't cost any public money. This is not taking anything from the Treasury."
How the proposed bill will work
People who receive a notice of foreclosure would have 25 business days to file in court and petition to rent their homes for up to five years at a rate determined by a court-appointed appraiser. Responsibility for ensuring compliance with the bill will be given to the Department of Housing and Urban Development (HUD), similar to its current supervision of other relief efforts like HAMP.
Not everyone who gets a foreclosure notice will be eligible for this program. The home must be a median- or lower-priced property (for the area), it must be a primary residence, it must have been occupied by the (former) owners for at least two years and the foreclosed mortgage must have been originated on or before July 1, 2007.
How the bill helps lenders
Foreclosure costs lenders in several ways: First, there is no income stream coming from the property. Second, there may be property damage when the former owners are evicted, or from neighborhood vandalism when the property becomes vacant. Finally, there is the cost of selling the home in distressed circumstances -- hardly the way to get the best price and recoup losses. The cash flow from these rentals allows lenders to hold foreclosed properties back from the market while values are low. This can also serve to keep inventories low and neighboring home prices from falling. But the question remains: do lenders want to be landlords?
How the bill helps families
People who can afford to pay a fair market rent don't have to leave a home they can no longer afford to own. Kids can keep their favorite rooms and stay in their schools. Lives don't have to be further disrupted by a move. Former homeowners don't have to go through trying to get approved by landlords when their credit has been slashed by a recent foreclosure.
How the bill helps neighbors
By keeping properties occupied, the bill would benefit neighborhoods as well. Instead of foreclosures upending communities, increasing blight, crime and homelessness, the bill would keep families in their homes. Instead of decreasing property values and tax revenues, causing layoffs and cuts in services, communities would be far more stable and able to sustain an economic recovery. By keeping foreclosed homes off the market, local property values are supported and the downward spiral of foreclosures that decrease property values (possibly causing more foreclosures) would be halted.
Fannie Mae and Freddie Mac both have some limited version of a foreclosure rental program, but a standardized and mandatory program (for lenders) is expected to make a much bigger impact, while costing bailout-weary taxpayers nothing.
Progress?
One stumbling block to the bill, however, is that many lenders have said that they would prefer not to be forced into being landlords. So it is hoped that the bill will motivate lenders to come up with more workable mortgage modifications rather than foreclosing. Currently, a borrower who is not underwater is unlikely to be granted a modification when the lender can simply foreclose, sell the property and get its money back. By requiring lenders to rent property back for up to five years rather than selling off the home, the borrower gets a bit more leverage. The lenders' mysterious net present value (NPV) test will likely have to be changed, presumably to favor the borrowers a bit more. "By not allowing banks to simply throw someone out, it makes foreclosure a much less attractive option," said Baker.
The bill was referred to the House Committee on Financial Services back in April, and the majority of legislation does not make it out of committee. If you think this bill might benefit you or your community, contacting your representative could help the bill get out of committee and into law.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.
