But recently a proposal came across my desk that I believe is so smart, and so sensible, that I hope our nation’s policy makers will give it a serious look. It comes from Daniel Alpert, a founding partner of Westwood Capital, a small investment bank. I have quoted Mr. Alpert frequently in recent columns, because he has been both thoughtful and prescient on the subject of the financial crisis.
Here’s his idea: Pass a law that encourages homeowners with impaired mortgages to forfeit the deed to their lenders but allows them to stay in the homes for five years, paying prevailing market rent. Under the law Mr. Alpert envisions, the lender would be forced to accept the deed, and the rent. After five years, the homeowner-turned-renter would have the right to buy the home back, at fair market value, from the lender.
There are so many things I like about this idea that I hardly know where to begin. Let’s start with the fact that it doesn’t require a large infusion of taxpayers’ money. Indeed, it doesn’t require any government money at all. It also doesn’t let either homeowners or lenders off the hook, as many other plans would. The homeowner loses the deed to his home, which will be painful. The lending institution, in accepting prevailing market rent, will get maybe 60 or 70 percent of what it would have gotten from a healthy mortgage-payer. (Rents are considerably lower than mortgage payments right now.) That will be painful too. Moral hazard will not be an issue.
As Mr. Alpert told me the other day, his proposal “admits the truth: the homeowner doesn’t have equity, and the lender has taken a loss. They should exchange interest, but not in a way that throws the homeowner out in the street.”
Sounds fair enough and certainly is not a one-sided solution. The banking industry AND homeowners taking such a high risk are both at fault and BOTH should be held accountable and share some of the loss. I am told that some of the lender banks facing loss were not even in existence not too long ago. If this is the case they should take their losses and get out of busines FAST.
The basic idea has potential. Two initial caveats:
— From a legal standpoint, “who owns the deed” is more nuanced than Alpert seems to realize. In some states mortgage lenders already have legal title to property.
— We’d also need to consider whether a borrower-tenant would had given up hope of redeeming the property would have adequate incentives to maintain it.
#2:
It is a sinful world, so some would undoubtably become a bit lazy in their home maintenance, but I believe far many more people would want to continue with life as it always has been (who wants to admit to the neighbors in Yuppieville that they are now renting rather than owning?). This plan offers people the chance to keep their homes and seriously address their financial situation, and it gives everyone the opportunity to both share in the pain of the mistakes (good lesson for the future) and to participate in the recovery. From a Christian perspective, it seems great as God often reminds us that the needs of others trump our rights. Yes, the banks have the right to foreclose. Does the need for shelter, however, trump this right? It sure beats raising all our taxes to pay for a bunch of high-priced execs to go on frilly resort trips or exotic hunting trips.
I think it’s a good idea that lenders ought to consider, but make it a law? Sorry, no sale.
WHY?
Loan modifications, reflecting current fair market value, are far more helpful. Keep the owners as owners. Do not result in massive capital impairment (and likely insolvency) of lenders. (Even large banks do not have the capital to become large-scale landlords, and the 5-year option prevent sale of the properties.)