Why not protect the homeowner?

This morning I was reading Simon Johnson’s excellent post “President Obama’s Regulatory Reforms Announcement: A Viewer’s Guide” about what Barack Obama should say when he makes his regulatory reform pitch today at 12:30 PM.  I agree with what he has to say about the need to re-assure us his ‘administration ‘gets it.’  And I suggest you read his commentary.  But, all the while I was reading it, I couldn’t help but think: ‘what about the homeowner?’

See, we have bailed out the financial services industry to the tune of nearly $14 trillion in guarantees and support according to the U.S. bank regulator the FDIC.  Yet, time and again we see differential treatment elsewhere.  Chrysler and GM were forced into bankruptcy and, more recently, California was denied aid.  The preponderance of evidence suggests that President Obama views the banking industry as systemically important in a way these other industries may not be.  The question is: how does he view homeowners, who collectively are American workers, taxpayers and voters?

I ask this because mortgage debt was the trigger for the financial crisis. And I have yet to see any comprehensive legislation protecting homeowners from financial distress, while we have certainly put the financial services industry and its reform front and center.  Just yesterday, in his “Ideas for fixing the economy,” Felix Salmon mentioned an idea first proposed in August 2007 by Dean Baker and Andrew Samwick which I will dub ‘rent-to-own.’ Baker and Samwick propose the following:

There is a simple way to allow troubled homeowners to stay in their homes without also bailing out the mortgage issuers and speculators.

Congress can pass legislation granting current homeowners the right to stay in their homes as long as they like, simply by paying the fair-market rent. In other words, no one gets tossed out on the street, as long as they can pay the rental value of their house. The fair rent would be determined by an independent appraiser — exactly the same way that a lender is supposed to determine the size of a mortgage that can be issued on a home.

Under this plan, homeowners would turn over their property to the mortgage holder. This would generally not be a loss since borrowers currently face crises precisely because they owe more than the value of their house. If the value of the home exceeded their debt, then they wouldn’t have to sign up for the program.

As a renter with secure tenure, the former homeowner would have incentive to do necessary maintenance and keep the home from falling into disrepair. This would prevent the blight that is already hitting neighborhoods where foreclosures have become commonplace.

The mortgage holder would get possession of the house, but they would be stuck having the former homeowner as a tenant. Otherwise the mortgage holder is free to hold or sell the property as they choose. Being stuck with a renter may reduce the resale value of the house, but intelligent investors knew there was risk when they got into the business.

To limit the size of the program and to ensure that it only benefits those who are really in need, there can be a cap placed on the value of homes that qualify. For example, Congress could stipulate that only homes with a market value below the median price for an area are eligible for this plan.

This security-of-housing proposal meets the needs of the homeowners who were victimized by deceptive lending practices and pro-homeownership ideologues. It gives them the right to stay in their home as long as they want. It accomplishes this task in a way that provides minimal opportunities for fraud and should require very little by way of new government bureaucracy.

It also manages to benefit homeowners in crisis without also rescuing the financial institutions that were speculating in mortgages gone bad. This will give the presidential candidates, and other members of Congress, a clear choice between helping distressed homeowners or bailing out financial institutions that should have known better.

Although the Baker-Samwick proposal does not specifically include a rent-to-own provision, whereby the renter has the option within a certain timeframe of buying back the house, it can easily be added.  Clearly this proposal has merits, yet I have heard nothing on this score for months except via Felix’s post.

I might add that there is also a huge amount of shadow inventory – repossessed houses not currently on the market due to the glut of residential housing inventory – which needs to be dealt with.  Calculated Risk has a sobering video from Jim the Realtor which makes this issue plain. This glut of inventory is likely to push house prices down lower, forcing many into negative equity and default.

So, my suggestion is that you should keep the homeowner in the back of your mind as you listen to President Obama make his case for banking regulatory reform.  I certainly want to see real reform, much as Simon does – and I will be listening for cues that we are going to get it.  However, I also think the time is right for homeowners to move center stage as well.