The Daily Ramble: Obama Is Thinking About A Rental Alternative To Foreclosures?
This hit the news today and I have to admit I was a bit surprised. While everyone is thinking of creative ways of helping people in distress in the current soft market, converting homeownership to a rental scenario is an interesting twist.
I am not so sure I like it.
The concept at this point as I understand it is that if a homeowner is going to go into foreclosure, they will be able to surrender the ownership of their property, and a court will set a rent (can you just imagine that!). The former owner will be allowed to remain and rent the property for a defined period, and the property will be resold subject to the lease.
While I can see investors salivating over this I do not know if it really is so smart. One of the main ways to get out of the mess we are in is an old-fashioned bloodletting. Yes there is pain and it is difficult and hurtful to families that got in over their heads, but forgiving them and renting the property out at an artificial rent simply delays the resolution of the problem.
A band aid instead of a surgical suite.
Obviously there is much discussion to be had on this proposal, but at first blush I think it is a do-gooder idea and nothing more.
Peter,
The only way the real estate market can rationalize is to offer these distressed properties for rent determined by the market for a period of set years with a transferrable but epiring option to buy at a multiple of rent equal to let say a 7-10% cap rate. Valuations will be forced to compress but it will rationalize prices quickly. Lenders should be required to participate in the properties write down in the proportion of the initial debt of equity ratio of the original valuation. Do you like that idea?