The right to rent

Dean Baker of the Center for Economic and Policy Research has been promoting this idea for a while. I like it, but so far it doesn't seem to have developed a substantial following.

Congress would give families that took out mortgages at the peak of the boom and are facing foreclosure the option to remain in their homes as renters for a substantial period of time -- five to 10 years -- while paying the market-rate rent. Earlier this year, Freddie Mac launched a similar policy, giving former homeowners the option to lease their recently foreclosed properties, but on a month-to-month basis. That was a positive step, but it does not give families the housing security they need.

In the markets affected most by the housing bubble bursting, the current rents would be 30% to 50% less than the monthly mortgage payments for homes purchased near the peak of the bubble. This means that many families that cannot afford their mortgage payments would likely be able to afford the market rent.

Although they would lose ownership of their homes under "right to rent," the residents would be able to stay in their homes, neighborhoods and schools. This would provide families facing foreclosure with needed stability and housing security.

Further, "right to rent" would enable more families to stay in their homes as owners, by giving banks an extra incentive to pursue mortgage modifications. Currently, in spite of the various government programs, most banks have little incentive to pursue modifications. In fact, the Treasury Department reported that as of July, Home Loan Services Inc., with more than 30,000 delinquent loans, was among those that had yet to initiate a single modification under the government's "Making Home Affordable Program." While a bank would still be able to sell a home after a foreclosure, the "right to rent" would attach to the home, so that a new owner would have to honor it. This could deter the sale of a home, because a home is much less marketable if it comes with a long-term tenant. If lenders know that they could get stuck with a tenant for five to 10 years, foreclosure would be a much less attractive option.

Click the image to the right for CEPR's study of projected changes in housing prices in various US markets. Circle sizes and colors (red: decline; grey: increase) show the projected changes in $1,000s. Numbers represent population size.