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The Mortgage-to-Lease Alternative to Foreclosure

The decline in housing prices as the bubble popped and the air went out of the housing market has devastated families forced out of foreclosed homes and communities with boarded up and deteriorating properties.  An obvious solution, with support from both right and left and proposed in legislation introduced by Congressman Raul Grijalva (D–AZ), is to let home owners give up the deed to their home but continue to live there as renters. With market rents far below the monthly payment on bubble-inflated mortgages, this solution could work for millions of cash-strapped families.

Fannie Mae, the quasi-public mortgage agency bailed out by taxpayers, has been reluctant to return the favor – preferring foreclosure to giving mortgage holders the option to remain in their homes as renters. Instead, it is Bank of America – owner of Countrywide, the robo-signing mortgage and foreclosure mill – that has stepped up to the plate to help out homeowners.

Yesterday, Bank of America announced that it would test a program that allows homeowners to remain in their homes as renters as an alternative to foreclosure. Under this plan, homeowners would give up ownership of their home and the bank would forgive the mortgage debt. They would then be able to continue to live in their homes as renters for up to three years.

Without second-guessing Bank of America’s motives, this is clearly a far better way to address the housing crisis than the government’s plan to have Fannie sell a big block of foreclosed homes to Wall Street investors and private equity firms. Private equity firms, who promise investors high returns in just a few years, see big profits to be made from buying up foreclosed homes and renting them out. Carrington Capital Management, which has teamed up with private equity firm Oak Tree Capital to create a $450 million fund to buy pools of foreclosed homes and rent them out, has a strategy it says will yield investors a 25 percent return over three years. That’s far above the returns that rental properties typically yield. It is likely that Fannie Mae will have to sell blocks of houses at a steep discount to attract the interest of private equity firms out to profit from the misery of underwater homeowners and make super returns. That would put the government in the business of directly transferring wealth to the wealthiest Americans.

Now that Bank of America has shown that there is a better way to help homeowners, it’s time for the government to adopt a mortgage-to-lease program. As a first step, Fannie Mae could immediately work with Bank of America to include mortgages owned by Fannie but serviced by B of A in the bank’s program.

Eileen Appelbaum is a senior economist at the Center for Economic and Policy Research and the co-author of ‘Leaves That Pay: Employer and Worker Experiences With Paid Family Leave in California.’

This article originally appeared in Economic Intelligence (U.S. News & World Report)

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