Right to Rent born as Deeds For Lease

Good news: It looks like a trial version of Dean Baker’s Right to Rent will be a go, carried out by Fannie Mae and called Deed for Lease. Daniel Indiviglio offers an overview and critique.

I wrote about this program back here. A few additional thoughts.

– There’s a question as to why are we setting this up? The CEPR put out a statement with one compelling example:

“This policy takes advantage of the fact that in many former bubble markets, ownership costs are likely to be far higher than the cost of renting an equivalent unit, if the homeowner purchased their home near the peak of the market. In many cases this gap can be dramatic. For example, the savings on a moderate-priced home purchased near the peak of the market in the Washington, DC area could more than $1,300 a month. The gap between ownership costs and renting in the Los Angeles area could be almost $2,000 a month.”

– There’s pretty robust empirical evidence that a foreclosure eats up ~28% of a house’s value in resale, and growing evidence that there is a significant, though relatively small, externality effect on neighbor’s houses. I don’t know the extent to which this externality would grow in a housing bubble crisis, though my suspicion is that it would bias towards a larger effect.

– Foreclosures are expected to to peak in late 2010. As such, this is a problem that will be growing for another year; new policy moves aren’t chasing the last problem.

– To whatever extent you can characterize a neighborhood by the amount of ‘order’ and ‘disorder’ it has, a worry for people moved by “broken-window” theories of crime, it is obvious that a massive wave of foreclosures would increase the amount of disorder a neighborhood has. If we are ok jailing a generation to save a window, why wouldn’t we ask some bond holders and property developers to take a haircut to save the whole house?

Though this predominately effects poor neighborhoods, this vacant, not maintained and otherwise abandoned property is everywhere, and will get worse next year. Here’s Noompa worrying that this winter will be particularly bad for this issue. Here’s a major piece on the abandonment in Cleveland. There’s a large amount of human devastation that will be coming with this wave; letting people stay in their homes with a decline in rental rates while keeping their communities intact will take some of this pressure off in the middle of a crisis.

– Daniel catches a problem: “The occupant agrees to be responsible for regular maintenance, to keep the property in good condition, and to permit marketing of the property for sale.” The obvious problem example is: Let’s assume that this winter, a Deed For Lease property has the heater break. Who fixes it? Presumably not the tenant, since he or she doesn’t want to invest in a home she doesn’t own. There’s also the reasonable assumption that the tenant is struggling financially, so the the person with the deed (Fannie in this case) will be responsible. Ideally, rolling this program out targeted at communities as opposed to random draws from the nation can overcome this; local groups can maintain these condos subject to competition for this service. We’ll see if that manages to work or not.

I hope a lot of eyes are watching this. Realizing the strengths and weaknesses of this program, tweaking where necessary, will hopefully lead to moving it forward into a larger framework.

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4 Responses to Right to Rent born as Deeds For Lease

  1. gabe says:

    I think these programs are a great idea. Foreclosure creates large losses.

    Also, the haircuts are too bad, but I don’t know that they put in place the wrong incentives. You get penalized if you own a bond where the value is much higher than the value implied by fundamentals like the opportunity cost of the rental stream of value. Basically, you get a haircut if you participate in an investment where prices deviate from fundamental implied values. It’s kind of a failsafe on bubbles or other deviations from fundamentals.

    If you can rent the house for a similar amount as you would get from the non-amortization part of a mortgage payment, then large persistent price increases are justified, as housing demand is high for all types of housing. If the rent is much lower, than that points to interest in equities like housing beyond the stream of value a house provides. That seems to point to a bubble. Investors that stay from bubble areas shouldn’t take a haircut, right? The rent should be enough.

  2. Rebecca Z. says:

    In reporting a story on the building industry in the mid 2000’s, a professor at Harvard described what was turning in to the ‘housing bubble’ as the greatest improvement in the US housing stock, particularly the northeastern stock, ever.

    I’m flabbergasted at the destruction of that wealth. Banks geared up for a foreclosure wave; but they did not gear up to become property managers, which is what would have been required to avoid what’s happening to houses all across the nation. (Perhaps the only up side is construction employment.)

    Rent-to-own would help prevent the destruction of the housing-stock improvements we made during the last decade, as well as helping families and neighborhoods.

  3. Chris says:

    Let’s assume that this winter, a Deed For Lease property has the heater break.

    I wouldn’t consider that “regular maintenance” — it’s an extraordinary event. The heater doesn’t break every winter (or at least it had better not).

    I don’t know if they have some misleading definition of “regular”, but by the ordinary meaning of the word, the heater breaking is no more “regular” than the porch collapsing or a tree falling on the house.

    P.S. How can foreclosure create losses? If the home’s price is inflated (usually), then the foreclosure sale only reveals an already-existing loss by the owner (which was already gained by the seller at inflated price); if not, the foreclosure buyer is buying below value and benefiting from a wealth transfer at the expense of the foreclosure seller.

    Burning down the house diminishes its value, but I don’t see how selling it can. Isn’t this confusing price with value?

  4. Brian says:

    No one washes a rented car.

    Houses require regular maintenance if they are to avoid structural damage (pipes need to be fixed, roofs repaired, regular painting, etc) and the general rule of thumb is that people should budget 1-3% of a home’s value for maintenance and repairs.

    Do you all really think that a financially strapped debt-owner is going to put that kind of money into a dwelling that he or she doesn’t own? Not a chance. Now, do you think Fannie or Freddie is going to overnight spin up a plan that will provide effective maintenance to several million homes for which they are now the deed holder – not a chance.

    This will not end well. This is another sinkhole in the making for taxpayers who will be stuck with the repair bill or suffer even greater losses as the physical condition of these houses deteriorates. This is just another element of the “extend and pretend”, kick-the-can-down-the-road approach of Geithner and Summers. These houses need to be foreclosed upon and sold to owners that have the means to maintain them. There are now bidding wars in former bubble markets due to all the preforeclosure homes being held off the market by forbearance and modification plans. The demand is there at the right price. Let’s face reality and stop pretending about the values of the homes and the mortgages.

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