By Anthony M. Freed
Here is the solution to most of the ills of the current housing crisis – in the form of a languishing US House Bill that would allow homeowners facing foreclosure the option to stay in their homes as renters, and perhaps even compel their lenders to be more cooperative with the distressed borrowers when negotiating loan workouts.
That’s right – a solution to the foreclosure problem that would save banks from certain ruin, keep homeowners in their homes instead of out on the streets and onto Public Assistance, put a bottom on the housing price crash while allowing for high-cost areas to come into par with median income levels, and save the taxpayer trillions of dollars in debt that is to be piled on to the trillions of dollars in debt we already own.
Sound too good to be true? That is understandable considering the constant barrage and misinformation being shoveled by the Federal Government’s sycophants like Paulson and Bernanke, the ridiculous political posturing of Barney Frank and his faux-hearings orchestrated to merely put the “official story” into the congressional record, and the complete and utter surrender of the Fourth Estate to news cycles and sound-bites.
The newest old proposal you have never heard of: Saving Family Homes Act.
Millions of people face the loss of their homes over the next few years. While the politicians in Congress have developed a wide variety of complex schemes in order to hold back this flood of foreclosures, including one passed into law last summer that provided up to $300 billion guarantees for new mortgages on homes facing foreclosure, none have had much impact thus far.
The unavoidable problem with these schemes is that it is difficult to design a plan that aids families facing foreclosure without giving an incentive to other homeowners to also default on their mortgage.In addition, it is hard to justify taxing the people who are struggling to keep up with their own mortgages in order to help those who default. It is even harder to justify taxing ordinary people to help out the bank executives, who issued hundreds of billions of dollars of bad loans.As a result, to date these programs have not prevented a tidal wave of foreclosures and evictions. The number of foreclosure filings (there are typically two or more filing for every actual foreclosure) is now approaching 300,000 per month.
I am sure there are some drawbacks somewhere in this plan, and it can be expected that there will be responses to this article and the legislation that will make some reasonable arguments as to why this bill should continue to languish in committee – as it has since MAY 2008.
But, I defy anyone to come up with a plan that is more practical, more easily implemented, would help more borrowers and lenders, and that would save the American Taxpayer trillions of dollars and a protracted economic downturn, perhaps even an economic depression.
With passage of this bill, the banks would be forced to either become the nation’s landlords – which is a business they do not want to be in under any circumstance – or working with homeowners to refinance or modify mortgages into affordable 30 Year Fixed products at current market rates.
This bill, or something similar to it could also provide opportunities to the renting ex-homeowners to later assume a mortgage and repurchase the home from the bank when the economy or as their personal financial situations allow.
While the basic point of the right to rent is simple, it can be extended in various ways to further aid homeowners. Bernard Wasow, at the Century Foundation, has proposed some additional measures to facilitate the transition to rental status or possibly a return to ownership. Daniel Alpert, of Westwood Capital, has a somewhat different version that creates a mechanism for homeowners to buy back their homes after five years.
The alternative is a tsunami of foreclosures that further drives housing prices down for all of us as the banks potentially become the owners of 1/3 of all US homes, a drawn-out cycle of bank failures and continued taxpayer bailouts of a ‘select’ few banks, and ultimately the destruction of the dollar as a world currency with permanent state of stagflation.
That would be the end of the middle class.
The Bill: H.R. 6116: Saving Family Homes Act of 2008
HR 6116 IH
110th CONGRESS
2d Session
H. R. 6116
To allow homeowners of moderate-value homes who are subject to mortgage foreclosure proceedings to remain in their homes as renters.
IN THE HOUSE OF REPRESENTATIVES
May 21, 2008
Mr. GRIJALVA introduced the following bill; which was referred to the Committee on Financial Services
—————————————————————————
A BILL
To allow homeowners of moderate-value homes who are subject to mortgage foreclosure proceedings to remain in their homes as renters.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘Saving Family Homes Act of 2008’.
SEC. 2. RIGHT TO RENT HOME SUBJECT TO FORECLOSURE.
(a) Exercise of Right- If, at any time after notice under subsection (b) for an eligible mortgage is provided to the eligible mortgagor and before the commencement of the 7-day period that ends on the first date that the foreclosing creditor may first commence or execute such foreclosure pursuant to such notice, the eligible mortgagor under the eligible mortgage that is subject to such foreclosure provides notice in accordance with section 3, notwithstanding such foreclosure or any other interests in the property, the eligible mortgagor may, at the sole option of the eligible mortgagor, continue to occupy the foreclosed property during the 20-year period that begins upon the commencement of such occupancy, subject to the requirements of subsection (c).
(b) Limitation on Timing of Foreclosure; Notice of Default and Right To Rent- Notwithstanding any other provision of law or any contract, a foreclosure of an eligible mortgage may not be commenced or executed before the expiration of the 28-day period beginning upon the receipt, by the eligible mortgagor, of written notice provided by the foreclosing creditor for the mortgage that–
(1) clearly states that–
(A) the eligible mortgagor is in default on the mortgage; and
(B) foreclosure on the mortgage may or will be commenced on account of such default;
(2) clearly states that the eligible mortgagor has the right, notwithstanding foreclosure, to continue to occupy the foreclosed property in accordance with this Act, and sets forth the terms of such occupancy under subsections (a) and (c); and
(3) identifies the first date, pursuant to this section and any other provisions of law and contract, that such foreclosure may be commenced.
(c) Terms of Periodic Tenancy- Occupancy, by an eligible mortgagor, of a foreclosed property pursuant to subsection (a) shall be under a periodic month-to-month tenancy under which the owner of the property may terminate the tenancy for material breach but shall have no authority, at will, to terminate the tenancy during the occupancy pursuant to subsection (a) if the mortgagor–
(1) timely pays to the owner of the foreclosed property rent on a monthly basis in the amount of the fair market rent for the property determined in accordance with section 4; and
(2) uses property as the principal residence of the mortgagor.
SEC. 3. REQUIRED NOTICE.
With respect to an eligible mortgage for which notice under subsection (b) has been provided, notice in accordance with this section is notice that–
(1) is made in writing;
(2) is submitted to–
(A) the court having jurisdiction and venue to conduct the covered foreclosure proceeding for the eligible mortgage or, in the case of nonjudicial foreclosure, the court in which an action is brought pursuant to section 5; and
(B) the foreclosing creditor; and
(3) states that the eligible mortgagor is exercising the authority under section 2(a) to continue to occupy the foreclosed property.
SEC. 4. DETERMINATION OF FAIR MARKET RENT.
(a) Initial Determination- For purposes of this Act, the fair market rent for a foreclosed property involved in a covered foreclosure proceeding shall be the amount that is determined by an independent appraiser who is licensed or certified, as applicable, to conduct appraisals in the jurisdiction in which the property is located, who shall be appointed for such purpose by the court conducting such proceeding or hearing an action pursuant to section 5.
(b) Periodic Adjustments- The fair market rent determined under subsection (a) for a foreclosed property shall be adjusted annually to reflect changes in the owners’ equivalent rent of primary residence component, for the appropriate city, region, or class of city, as available, of the Consumer Price Index for All Urban Consumers of the Bureau of Labor Statistics of the Department of Labor.
(c) Redetermination- If the owner of a foreclosed property or the eligible mortgagor under the eligible mortgage requests the court described in subsection (a) to redetermine the fair market rent for a foreclosed property determined pursuant to this section (as such amount may have been adjusted pursuant to subsection (b)) and agrees to pay any costs of such redetermination (including costs of the appraisal involved), the court shall provide for redetermination of the fair market rent for the foreclosed property in the manner provided under subsection (a), except that no such redetermination shall be made pursuant to a request under this subsection made before the expiration of the 12-month period beginning upon the most recent redetermination conducted at the request of the same party.
SEC. 5. NONJUDICIAL FORECLOSURE PROCEEDINGS.
In the case of any covered foreclosure proceeding that is not conducted or administered by a court, the eligible mortgagor may bring an action in an appropriate court of the State in which the foreclosed property is located for a determination of fair market rent for the foreclosed property for purposes of this Act, by filing notice in accordance with section 3 with such court and otherwise complying with the rules of such court.
SEC. 6. NO BAR TO FORECLOSURE.
This Act may not be construed to delay, or otherwise modify, affect, or alter any right of a creditor under an eligible mortgage to foreclose on the mortgage and to sell the foreclosed property in connection with such foreclosure, except that the right of any owner of the property to possession of the property shall be subject to the leasehold interest established pursuant to section 2(c).
SEC. 7. RIGHT TO REINSTATEMENT.
This Act may not be construed to affect any right of any eligible mortgagor to reinstatement of an eligible mortgage, including any right established under contract or State law.
SEC. 8. JURISDICTION OF FEDERAL COURTS.
At the option of the eligible mortgagor, a proceeding under section 4 or 5 shall be removed to the appropriate district court of the United States in accordance with section 1441 of title 28, United States Code.
SEC. 9. EFFECT ON STATE LAW.
This Act does not annul, alter, affect, or exempt any person subject to the provisions of this Act from complying with the laws of any State regarding foreclosure on residential properties, except to the extent that such laws are inconsistent with any provision of this Act, and then only to the extent of such inconsistency.
SEC. 10. DEFINITIONS.
For purposes of this Act, the following definitions apply:
(1) COVERED FORECLOSURE PROCEEDING- The term ‘covered foreclosure proceeding’ means a foreclosure proceeding with respect to an eligible mortgage, and includes any foreclosure proceeding authorized under the law of the applicable State, including judicial and non-judicial foreclosure proceedings.
(2) ELIGIBLE MORTGAGOR- The term ‘eligible mortgagor’ means a mortgagor under an eligible mortgage.
(3) ELIGIBLE MORTGAGE- The term ‘eligible mortgage’ means a first mortgage–
(A) on property that–
(i) is a single family property; and
(ii) has been used as the principal residence of the eligible mortgagor for a period of not less than 2 years immediately preceding the initiation of the covered foreclosure proceeding involved;
(B) that was made in connection with the purchase of the property by the mortgagor for a purchase price that is less than the median purchase price for residences that are located in–
(i) the same metropolitan statistical area; or
(ii) if the property is not located in a metropolitan statistical area or information for the area is not available, the same State; and
(C) that was originated before July 1, 2007.
For purposes of subparagraph (B), the median purchase price of residences located within a metropolitan area or State shall be determined according to information collected and made available by the National Association of Realtors for such area or State for the most recently completed month for which such information is available.
(4) FORECLOSED PROPERTY- The term ‘foreclosed property’ means, with respect to a covered foreclosure proceeding, the single family property that is subject to the eligible mortgage being foreclosed under the proceeding.
(5) FORECLOSING CREDITOR- The term ‘foreclosing creditor’ means, with respect to a covered foreclosure proceeding, the creditor that is foreclosing the eligible mortgage through such proceeding.
(6) OWNER- The term ‘owner’ means, with respect to a foreclosed property, the person who has title to the property pursuant to the foreclosure proceeding for the property, and any successor or assign of such person.
(7) SINGLE FAMILY PROPERTY- The term ‘single family property’ means–
(A) a structure consisting of 1 to 4 dwelling units;
(B) a dwelling unit in a multi-unit condominium property together with an undivided interest in the common areas and facilities serving the property; or
(C) a dwelling unit in a multi-unit project for which purchase of stock or a membership interest entitles the purchaser to permanent occupancy of that unit.
SEC. 11. APPLICABILITY AND SUNSET.
(a) Applicability- Subject to subsection (b), this Act shall apply to any covered foreclosure proceeding that has not been finally adjudicated as of the date of the enactment of this Act.
(b) Sunset- This Act shall not apply to any foreclosure proceeding commenced after the expiration of the 5-year period beginning on the date of the enactment of this Act.
Your Mortgage or Your Life... 
One problem: What if you can’t afford the rent??
Who will be responsible for repairs?
Nothing will be perfect, we can’t save everyone – but we can at least make the banks and the borrowers both negotiate in good faith a resolution that keeps the losses from being passed on to the taxpayer – this will solve a chunk of the problem.
It is sure better than what we are doing now, which is using our tax dollars to incentivize the banks to let the foreclosures happen – they get reimbursed for their losses, end up owning 1/3 of all the homes in America, and never lose a dime of their 100’s of billions of ill-gotten pay, bonuses and sweetheart stock option deals – putting the economy in the toilet while they walk away with our money.
This is better than anything I have heard, as it addresses most of the issues surrounding the crisis for the working-folk: foreclosure and eviction.
Screw the banks, let them pick up the repair costs out of the billions in fees they charged to make these bad loans – then there will be work for unemployed construction workers.
So, you give a defaulted homeowner the RIGHT to stay in the property after they have stopped paying on the “bad loan”. Why would any lender want to loan money for a home in the future if they see the government stopping the lender from take a property back to secure their debt.
It will prevent good loans in the future, and excuse bad behavior of buyers and lenders and investors of the past.
The real fix is to allow the foreclosure and the buyer loses the house and huge debt, rents for a few years, THEN buys the same home at the correct price. Speed up the price drops and we will be out of this mess because the dirty little secret is that banks are looking for excuses not to loan because they KNOW the prices are still dropping. The want to wait until we hit bottom to start lending so their loan portfolios look good.
Give master sercivers (the ones making the calls on modifications or short sales) immunity from liability for good faith decisions from the investors in the MBS pools they represent. Banks (master servicers) want to drop prices but they are scared of the investors suing them, so prices are not dropping fast enough. Once we are at the bottom the lending will re-start and the economy will be in a position to recover. The trip down is where the problem lies.
Congress needs to stop being ignorant and wake up to the fact that they need to “benefit” people and not necessarily “please” them. Foreclosure sucks, but being saddled with hundreds of thousands of extra debt sucks more, and most of these loans should have never been done.
There is no *magic* pill to solve this crisis. Banks lent money to unqualified borrowers and unqualified borrowers gladly took the loans no matter what the terms. The government will not solve this problem only put us in more debt by printing more dollars to bailout banks. The “free” market (or what’s left of it) will determine how this crisis will be resolved and the government must allow the free markets to work without intervention. People will lose their homes. They have in the past and they will in the future. Banks need to get more involved with their communities and real estate investors to reach out and provide realistic loan programs to rehab all of these foreclosures and provide affordable renting/housing to those people that made the mistakes. I have more deals on my door than I know what to do with and with the change in the government run Fannie and Freddie guidelines you can forget about getting traditional financing. There is money to be made from both sides of the fence, but everyone is gunshy and not enabling it to happen.
I reviewed a note buyer’s strategy and was intrigued. They buy notes at reduced value and then rewrite to today’s value and if the homeowner can afford the monthly payment they require (5% of current value divided by 12), they can stay in home with new note, make 24 straight payments and then when able they refi them into an FHA loan. If they can’t afford the note, they give them move out expenses (cash for keys so they don’t trash the joint), and find someone who can afford the payments. Seems to me every lender, investor, bank should be considering this strategy with all of their risky debt, considering the losses they take already. It’s just a shame that the guy who pays regularly gets the short end of stick–but maybe they consider rewrites on theirs once they clean up the initial mess. He won’t complain too much if his home values starts to steady rather than sink like a ship.
While this plan doesn’t seem as simple as it is stated. It does have some selling points and also some cons to it as well.
I agree with the comment above that banks won’t want to lend as much if they think that you may foreclose and they’ll have to pick up the bill, but really ask yourself won’t that restrict lending to those who actual can afford it? Making things more stringent thus doing good for home values for first time buyers and those who save up and want to actually pay off their mortgage. If the pool of qualified buyers shrinks than home prices need to go down to reflect.
The temporary fix I guess at this point is that if banks can charge rent on these people than these people might actually pay rather than try and live rent free for a year before they get evicted from the place. Too many people have gotten to the point of feeling hopelessly stuck they just gave up paying their mortgages and to see no one getting kicked out of their homes they think why would they be the ones to get kicked out. They can’t be the unlucky ones.
I am all for sound resolutions that solve the crisis without creating too much unequal equity to those that favor while those who didn’t do anything shouldn’t get punished. I just don’t know how acceptable banks are about this nor homeowners. Because as surprising as it is there are a lot of homeowners who just don’t want to sell their homes thinking their house wasn’t affected by price depreciations. And this is what is causing the slow return to real home prices.
I’ll take a try at the downside to this plan, and any bailout plan:
I didn’t jump into the feeding frenzy. I saw the signs that the house market was behaving irrationally. I wait to buy, anticipating the pop and reversion to a sane, reasonable, and affordable price. Allowing the overextended masses to remain in homes that they can’t afford keeps the market artificially inflated and it keeps me out of a home.
By your definition, I don’t own a home. Therefore, I’m homeless, equivalent to those folks who have already lost a home that was purchased at an unaffordable price with sleight-of-hand financing at best, fraud at worst. What’s your proposal to get me into a home at a price where I’m not overextended?
Or, is not owning or being able to afford a house the the penalty I pay for being observant and actually reasoning that the housing shenanigans were and are completely absurd.
Utopia ! Is absolutely true.
But so is crime.
Incedently the prisons are more occupied than the churches. That IS reality.
The banker would fore-close the house.
Have the owner thrown out. They prefer that the house get wrecked, get dilapidated by the day, and make it a ground for crime and unsocial activities, than anything close to what you suggest.
All we need to do is open our eyes and look out and find out which one is true?
I recall reading somewhere that 45% of
foreclosure actions were against unoccupied houses – no resident could be located. Either they had already packed up and moved out or it was not a primary residence but a speculator/investor trying to flip the property. So even if this works, it only gets to a little more than half the problem.
A second problem: in any areas where
current mortgage payments are substantially above rents it creates the
following incentives:
1. a borrower can start a mortgage, default, and get the lower rent – if there is no down payment, this could be a
significant incentive to game the system
2. because of 1.) no one in their right mind would loan money for purchasing a house – either housing prices rapidly fall to be consistent with rents, or no loans get made OR the gov makes all the loans and takes the hit…
You’re just not getting the fundamental problem with the housing crash – you can’t force a bottom to prices! The fact is that housing prices are “crashing” back to what they SHOULD have been originally. Home prices shot to astronomical, unaffordable levels due to massive speculation and extremely loose lending practices. In other words, people couldn’t afford the houses in the first place, but they bought homes they couldn’t afford anyway because they thought they’d be able to ditch it in six months for a profit.
Home prices are not “crashing”. They are coming back to earth, where they belong. You can’t MAKE people pay more for a home than they can afford, and now that people aren’t certain that they can sell an unaffordable home for a profit, they are only willing to buy an AFFORDABLE home. There you have it. It’s that simple. Home prices will fall until people can afford them again. No amount of government intervention or social programs will change that. All that government intervention will do is put us further in debt, and make our recovery much longer and harder than it has to be.
Look at it this way – our economy was booming because everyone was selling real estate and/or using their home equity to buy consumer goods. But home expenses were so high that no one had any true “earned” discretionary income left over to puchase goods or invest in businesses – so when the housing market died our entire economy died.
If we modify these mortgages and/or rent payments so that these people can just barely afford their home payments again, then there’s still no discretionary income left over for anyone to purchase goods & services or invest in businesses.
BUT, if all these people who have “unaffordable” mortgages just let the house be foreclosed on and rented a more affordable home, they would find that they have hundreds, if not thousands, of extra dollars each month. In other words, they still have a roof over their head, they still have a place to live, they still have somewhere that their family can be safe, but they have enough money to go out to eat once in a while. Or buy a bike for their kid. Or buy a new washer & dryer. You get the idea.
So, if we allow the housing market to fall back to normal affordable levels, our economy will start to pick up again, and we’re on the road to recovery. But, if we continue to insist that housing prices “must stay high”, keep paying far too much on house payments, and finance all those high prices at the expense of the U.S. taxpayer, then we’re merely dooming ourselves to a long protracted recession.
Why not jut give all homeowners in distressed areas a haircut on their mortgage? Make it an option to take the haircut but agree to split any proceeds upon sale 50/50 with the US Gov’t. The borrowers credit would not be negatively impacted by this decision. Btw..In some states it’s easier to evict renters than foreclose on homeowners.
Here is a great idea…let the free market dictate. I feel more comfortable letting potential investors forsee the bottom as opposed to..you, the government? Please…governmental intervention is not the answer. They can’t even run social security, medicaire, Katrina righ…and now this?
Michael – I agree, but we are way beyond that point – the Gov is all dirty in this mess now.
I am all for the market to settle this – but if the alternative is giving our tax dollars to those overpaid blood suckers at the big banks, you can forget it.
I would rather give the money to my neighbor anytime.
The bottom line here is that traditionally, fair market value for a home has always been based on market rent. The boom in housing prices came directly from the loose lending practices (which by the way were encouraged by the federal government in order to stimulate home ownership). What is wrong with valueing a home with consideration of how much rent would be generated? While nothing is perfect, this shifts the home ownership to the bank without forcing the foreclosure, and sets a market value on the home which is reasonable.
Secondly, this will create a floor on the housing prices. That floor will be established by market rent, which is the correct way to establish value.
This also shifts responsibility to the lender as opposed to the taxpayer to work out a solution, and gives them more time to do so, without forcing major losses. If they want to incur the losses, they can do so by eviciton, or they can come up with a plan to stave off the losses.
It is impossible to identify one entity that is “at fault” for where we are currently. The fault lies with the federal government for forcing lenders to make bad loans to stimulate home ownership, the lenders for not correctly identifying how much risk they were assuming for making the bad loans, the borrowers for taking bad loans that they couldn’t afford even on first payment, the realtors for encouraging people to buy homes that they obviously couldn’t afford, the mortgage brokers that arranged for loans to people without concern of whether or not they could pay, etc., etc., etc.
None of that really matters at this point. The golden rule applies. The lenders had the gold and made the rules. They still have the gold and make the rules. Rule #1 right now is that they are going to hold onto the gold. Period. No amount of pushing and prodding by the government or anyone else is going to change that. The only thing, in my opinion that will get things moving again is to establish a bottom to prices (which a market rent analysis does) and giving the lenders the time needed to re-assess risk. All that they can focus on at this point is losses.
I’m all for the lenders figuring this out and this allows them the opportunity to do so. If you think they’re going to stop lending in perpetuity, your crazy. They like money and they make a lot when they make good lending decisions.
I hate govenrment intervention altogether. It stops the free market from operating correctly, but in this case, I fell that this bill would put things on track to get things moving again
What about the millions of people who are 30% or greater upside down on their mortgage. I have heard their is another plan out their where a Federal Judge changes the terms and amount of the loan. Something like 80% of current value, rate prime plus 1, 40 year fix and a bi-weekly payment plan. Their would be additional conditions and limitations. With declining home values and the additional cost of selling, foreclosing and maintaining a home this seems like a more practical solution.
On the weird side I have heard of a plan to get rid of the existing homes that have already been foreclosed on. Lenders would have a drawing via a State or Federal website for existing foreclosed homes. They would be required to deliver the home in good condition and pay one years worth of taxes and property insurance. The lenders would be limited to the amount currently owed on the mortgage with no additional fees.
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We should go with the bankcrupcy plan. Let a judge decide what the terms of a new loan should be
I think Dean Baker of CEPR has been pushing a similar idea as well, and I hope this type of plan is implemented.
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