Could the Right to Rent Stop the Foreclosure Hurricane?
When the foreclosure hurricane first hit, subprime borrowers absorbed the brunt of it. Homeowners who had been fooled with teaser rates suddenly faced balloon payments they couldn't afford. Others couldn't refinance because of prepayment penalties they hadn't been aware of. And some people had made bad decisions and were now paying for it with their homes.
The crisis has now morphed—it's hitting everyone with an equal-opportunity kind of vengeance—the prime, subprime, underwater and unemployed. And that makes passing the Right to Rent Act introduced by Democratic Representatives Raúl Grijalva and Marcy Kaptur, and cosponsored by House Judiciary Committee Chairman John Conyers among others, all the more critical. It would give homeowners who would otherwise by kicked out of their homes the right to rent for five years.
From the outset of this crisis, little relief has been in sight for foreclosure victims. In contrast, the big banks were on the receiving end of a $700 billion bailout and have been given the right to decide which homeowners sink or swim ever since.
Early on, community activists and too few elected officials argued that the bailout funds should be contingent on banks' participation in mortgage modifications programs, among other remedies, to help regular folks. After all, there was ample evidence that banks had steered borrowers who should have qualified for prime loans into exotic subprime products with higher yields—that the big banks had indeed engaged in a kind of reverse redlining.
In fact, back in January, Illinois Attorney General Lisa Madigan testified to the Financial Crisis Inquiry Commission about rate sheets that revealed Wall Street had paid mortgage brokers and loan officers more for risky mortgages—with low teaser rates, pre-payment penalties, low- or no documentation of borrower income—because those loans charged higher interest rates. Wall Street wasn't the victim of bad underwriting as it claimed, it had incentivized it.
Nevertheless, opponents to forced modifications cried "moral hazard," and—without even a hint of irony—said that bailing out the homeowners would reward them for bad behavior.
We now see where their umbrage has gotten us.
There were 367,056 foreclosure filings this March—a new monthly record. May was also a record-setting month, with 94,000 homeowners losing their homes to foreclosure. In the first three months of the year, the safest borrowers with fixed, prime mortgages accounted for nearly 37 percent of new foreclosures and now represent the fastest growing group facing foreclosure. One in seven homeowners are either in foreclosure or seriously delinquent. The Obama administration may tout jobs numbers as a sign that the Great Recession is behind us, but foreclosure filings tell the story of real pain that hasn't abated.
As homes are vacated or boarded up, the neighbors who are left behind watch their property values plummet. State and local budgets—already decimated—take in even lower revenues, and the result is more cuts in services and more layoffs. More unemployed people means more foreclosures, and the vicious cycle continues.
Meanwhile, the Obama Administration's Home Affordable Modification Program has proven anemic. Leaving modifications up to the banks' discretion and dangling "cash incentives" of a couple thousand dollars per modification—nothing more than chump change for these bankers—is like trying to repel a hurricane by whistling into the wind. HAMP was supposed to help 3 to 4 million borrowers by the end of 2012. It has placed just 340,459 homeowners into permanent modifications.
Does anybody have a real emergency plan? Something that will help our communities ride out this storm before they are rendered virtual ghost towns? Or will we keep engaging in the most hazardous moral around—allowing banks to call the shots?
The Right to Rent Act would stop this cycle immediately. The proposal was first suggested by progressive economist Dean Baker, co-director of the Center for Economic and Policy Research, and it has been endorsed by experts across the political spectrum.
Here's how the law would work: your family receives a foreclosure notice. You have twenty-five business days to go to court and exercise your right to rent the property for up to five years. The fair market rate is determined by a court-appointed, independent appraiser. To be eligible, the single family property must have been occupied for at least two years, and purchased prior to July 2, 2007, at median price for the local metropolitan area. The bill would sunset after five years.
"This is something Congress could in principle do and immediately help hundreds of thousands—if not millions—of people who are facing foreclosure," said Baker. "And it doesn't cost any public money. This is not taking anything from the Treasury."
If banks don't want to be landlords—and they don't—this law would provide a strong incentive for them to make meaningful modifications to mortgages, including principal reductions, rather than take on a tenant for five years.
"By not allowing banks to simply throw someone out, it makes foreclosure a much less attractive option," said Baker.
A right to rent would also allow families time to search for alternative affordable housing or receive job training to better their situation—difficult to do when facing homelessness. After five years, that family might be in a position to buy back the home and would be an attractive buyer if it had already been making monthly payments. Afforded time, homeowners might also discover that bank error resulted in their being wrongly denied a mortgage modification, and they can obtain legal aid to correct the injustice.
"We have asked time and again for banks to work with the American people to do loan workouts," Kaptur told The Nation. "The outcry from the American people has largely been ignored by banks and mortgage security holders. With nearly 6 million people delinquent on their mortgages and at risk for foreclosure, we can no longer afford for banks to continue turning their backs on the American people."
Instead of foreclosures increasing blight, crime and homelessness, neighborhoods would keep people in their homes who care about them and their communities. Instead of decreasing property values and tax revenues, and consequent layoffs and cuts in services, communities would be far more stable and better able to contribute to the economic recovery. And Baker points out declining property values—especially in bubble markets—mean that people are sometimes paying twice as much on their mortgage payment as they would pay to rent the same home.
"Passing this bill will help neighborhoods avoid the spiral of decay, crime and lower property values that often follows mass vacancies without creating any new bureaucracy or transferring a dime of taxpayer money to homeowners or banks," said Grijalva.
The downside is that homeowners still lose their homes when the banks foreclose. But it would be an invaluable tool available to many people who will otherwise be out on the streets, and it doesn't preclude continuing to fight for mandatory modifications, or other reforms like a new Home Owners' Loan Corporation.
A right to rent sure beats listening to Obama administration officials continuing to promise to punish banks that aren't modifying mortgages and somehow never getting around to doing it. And it definitely beats continuing to watch our nation bleed generations of wealth, entire communities and human capital.
"Let's just be really clear on this," said Baker. "If Congress and the Fed did not step in—Citigroup is out of business today. Goldman Sachs is out of business today. Morgan Stanley is out of business today. The banks got helped out. Now we're going to help people on the other side."
Kaptur agreed. "Banks were saved by the very same families they placed in this dire predicament," she said. "It is high time for them to return the favor and save American families from homelessness."
Now would be a good time to ask your representative to cosponsor this legislation. Also, ask the Financial Services Committee—which has jurisdiction over the bill—for a hearing on it. Finally, urge your senator to sponsor companion legislation.
It's time to allow people to fight back against the banks with a right to rent.