I must admit, when I first read Baker's proposal, it struck me as a gross interference with property rights to give tenants the right to rent the property for so long (especially after foreclosure). But the more I thought about it, the more comfortable I became with it. Yves Smith, in defending the proposal against Ken Bunnell's charge that it will degrade communities because renters tend to make bad neighbors, captures it perfectly: "Give people property rights, and they act like they have property rights."
I have great respect for EoC, and for Andrew Samwick, who is a fan. But as it happens, I've been going to a lot of events on the crisis and consumer credit over the last few weeks. And the consensus on this plan is it can't be done, for multiple reasons:
1) What is the "fair market rent" to be determined by an "independent appraiser" on a 90% empty exurban development without the legal minimum sales to form a homeowner's association?
2) The tenants may be willing to invest in upkeep, but who fixes the plumbing when it breaks? The servicers are not rental agents. Moreover, they have no legal ability to become rental agents under their contracts. There is no entity in the position to take the role of landlord to these people. This is seen as the biggest--nay, insurmountable--obstacle. The only way this would work is if the government took possession of the homes, i.e. gigantic government bailouts.
3) There will be considerable political pressure on the "independent appraisers" to keep the fair market rental value down, handing the banks a loss.
4) Most of the people with the really problematic loans probably can't afford to rent their house, either.
5) To the extent that they could afford the rents--i.e. that houses were massively overvalued--you're putting a big capital loss on the bank's balance sheet and keeping it there, year after year, rather than writing it off.
6) The worst hit homes are in "developing areas" that are now rapidly "undeveloping", meaning that there aren't adequate services there. Encouraging people to stay in those areas is not, in the long run, a good idea. It also isn't a good idea to make people less mobile during an economic downturn.
7) Some of the worst hit homes are in areas where the tax base will not support the cost of basic services to the developments that the government is encouraging people to stay in.
8) Who gets to vote on the board of the homeowner's association? Are various servicers supposed to send people to represent their interests? Who pays the property taxes? You're sticking banks with a long term asset that neither they nor the servicers are set up to handle at all.
9) Keeping bad assets on bank books for years and years was, many argue, the main factor that made Japan's economy so festive in the 1990s. We should probably not repeat their error.
The rent-to-own plan is an attempt to engineer a bailout for free. And like most such "free" goodies, it seems like it will probably end up costing us more in the long run.
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