2009-01-09 — telegraph.co.uk
An eminently reasonable idea, those Brits have. I have been banging this drum for over a year now. The only reason I can gather that this plan hasn't been seriously considered in the US is because rental is actually considered a social taboo. But maybe it's time to drop that hang-up. After all, we probably need to change as a society regarding other cultural "undesireables," like hard productive work, science, and engineering. God forbid.
I have seen no major housing proposal that even acknowleges the problem of oversupply, and thus answers it by attacking supply directly. Instead, they all aim to stimulate demand, generally by attempting to supress interest rates or otherwise make financing easier. The problem is, this does what it has always done, which is inflate housing prices and stimulate production, which quickly puts us right back where we are.
Conversion to a rental, on the other hand, directly takes each distressed home off the for sale-market. And it does it without distorting prices or stimulating additional (and sorely unneeded) production.
Rental conversion also addresses other deficiencies. One of the major objections to homeowner "rescue" aid has been that it cannot distinguish between those who were truly predated upon, and those who were simply greedy and irresponsible borrowers. Rental conversion obviates this problem by simply putting anyone who cannot afford their home and needs help in a rental; it doesn't "give" them any undue homeownership (of course, a rental conversion program could still retain some sort of a warrant feature, divided between the homeowner and goverment).
And of course, it should go without saying that the rental the distressed borrowers will be "put in" will be the house they are already in, which solves the looming displacement problem just as well as making them titular owners of a ridiculously-overpriced house (mortgage).
For those that were truly predatory lending victims, they will at least be given the chance of a fresh start, with the process not considered a bankruptcy and most likely with reduced credit impact (due to the large quantity of people taking this route).
Whatever the rescue plan style, it should be compulsory on the part of the private financial institutions. That is, once the borrower applies, assuming they qualify with the government, the deal closes. The reasoning behind this is that the banks are now already being supported by the government, so they have no excuse not to eat the write-downs. They could be given a tertiary share in future appreciation as well (e.g., "silent seconds" style).
Also, as part of this, a cram-down to reasonable market values should be involved, otherwise the appreciation warrants will just be pure fiction, as it is unlikely we will (any time soon) reach the price peak of this historical bubble.
The biggest substantial objection I can see is that this would constitute government intervention on a mass scale. True, but we are already long past the point of government intervention. In fact, it was centrally responsible for the inflated housing market in the first place. They broke it, now they should have to buy it (and fix it). There is no reason (and no excuse that) the gradual liquidation process cannot work as well and orderly as the S&L portfolio liquidations.
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