Foreclosed-On Homeowners Turned Renters

Cited: Realty Times

Allowing foreclosed homeowners to remain in their homes as renters is a plan that first surfaced a couple of years ago and is gaining greater popularity today. “The basic point is you’re recognizing an unusual situation so you’re temporarily changing the rules on foreclosure,” says co-director of the Center for Economic and Policy Research, Dean Baker, who first proposed the plan.  According to Baker, nothing else seems to be working in foreclosures are on the rise.

“As it stands now, if I hold the mortgage on a house and the person hasn’t met the payments, I go to the judge and say ‘Look this person hasn’t met the payments.’ The homeowner is given a certain number of days and, if payments aren’t met by then, the house is mine. I throw [the homeowner] out on the street,” says Baker.  Baker’s plan proposes to change the rules of foreclosure for a limited period of time.

“Mortgages issued 2002 to 2006 or 2007, whatever time period we want to put in there. For those mortgages we’re going to recognize the unusual situation and say that if I want to foreclose on that person, I have to give [the homeowner] the option to stay there as a renter,” explains Baker.

The length of the rental period would be determined by Congress if the proposed bill passes. “My view is you want it to be as long as possible — seven years or 10 years — a lot of people wouldn’t take advantage of that whole time but the point is to give people substantial security in their home so they can stay there for a period of time as renters, paying the market rent. They’re not getting a subsidized rent,” says Baker.

The plan also binds buyers of the foreclosed property to commit to allowing the former homeowner to remain as a tenant for the rest of the guaranteed period. According to Baker, the important thing to note is the many benefits that this plan can bring for neighborhoods and property owners in those areas as well as those facing foreclosure.

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“The absolute worst thing you could have happen for a neighborhood is to have vacant properties and, of course, in a lot of these areas you have a lot of vacant properties. Banks often don’t care for them well. They don’t see to it that the grass is mowed, that broken windows are fixed or boarded up. Sometimes houses become crack houses or there are squatters there. So it’s the worst thing in the world to have a foreclosure and have a house sit vacant and in many places that’s exactly what’s happening,” says Baker.

But Baker says that this plan may actually keep people in their homes and also let them remain homeowners. “I think a lot of banks will suddenly get serious about modifying loans if the alternative is being a landlord for five years. So, I think it will keep more people in their homes as owners but certainly it’s also better to have a neighborhood that has renters in those houses than have them staying vacant.”

However, Baker says banks still may feel the loss. “There is a neighborhood effect that if you prevent foreclosures and keep homes occupied, [the banks] may actually benefit. But in any specific home, if [the banks] kept everyone else from foreclosing but they themselves got the right to foreclose, they’d probably be better off foreclosing and throwing the person out. So the banks weren’t happy about [the proposed plan],” says Baker.

And the public? Well, these matters can be very touchy. “When you talk about the bailout programs, the modifications that involve public money, it really breeds a lot of resentment,” says Baker.

Baker says, “You have someone saying, ‘Well, I’ve been paying my mortgage why should I subsidize this person who’s not?’” However, he says that’s not the case with the right to rent plan. Baker says that non-delinquent homeowners should understand that taxes are not being raised to support the plan.

According to Baker, the best thing about this plan is that it does not require any bureaucracy, just changing the rules.  This gives millions of homeowners who otherwise could just be foreclosed upon with no recourse another option.  This plan gives them something that they can hang on to.

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My Take: I like this idea!  It gives people the opportunity to stay in the home that they love instead of completely losing it.  It is also possible that once they are able to, they could start buying it again at a later date.  I see a lot of potential in this plan.

The main obstacle I can see is the banks; they always want their money now.  If banks would stop to think like the average person does, you might actually find a bank with a heart.  I know their main purpose is to make money, but the difference in the rental and mortgage payment can be written off as a loss did save some money in taxes.  However, I doubt they will see that point.

Although, it does give homeowners, who are about to lose their home, an opportunity to stay in your home longer instead of getting a foreclosure.  I know many homeowners would be concerned about their credit rating and how this would affect it.  Another aspect that might be incorporated into it is the possibility of not ruining their credit so that when they are able, they could purchase a home in the future.

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