Federal Plan to Allow Homeowners to Rent their Foreclosure??

Losing your home to foreclosure may no longer mean you have to leave. Congress and the Obama administration are considering a controversial plan that would allow homeowners to rent their foreclosed home for at least five years. The proposal is setting the real estate community abuzz.

"It's clear that the modification plans have not been as successful as Congress had hoped," said Dean Baker, co-director of the Center for Economics and Policy Research. "We need something that will make more of an impact."

Details of the rental plan are sketchy, but the idea is gaining momentum, according to U.S. Treasury assistant secretary Herbert Allison. He told the Senate Banking Committee last week that the proposal was being considered for homeowners whose mortgages did not qualify for modification programs to make them affordable.

Some versions of the plan involve lenders selling foreclosed homes to approved professional landlords. In other versions, the lenders would sell to private investors or keep the home and hire a management firm to handle the rental arrangement. The rent would be determined by the market-rate rent in the area, determined by a professional appraiser.

As a believer in free-market enterprise, I am not sure I like this. I understand where Congress is coming from, but as an investor I think most investors would shy away from this plan and banks will end up stuck in the real estate market.

Dean Baker, who first proposed the plan two years ago, said it has evolved and continues to be tweaked. Even though people who take advantage of the plan would still lose their homes, Baker said, the plan could keep that from happening to others.

"The lender would have more of an incentive to work something out through a modification because the home would be worth less," Baker said. Like they dont' already know this…

Under the plan, the lender still could sell the home but, Baker said, "the homeowner would come with the home." The homeowner, turned renter, would be allowed to stay until the lease runs out, which could last as long as 10 years.

Yikes, that means you could not sell your property to an end user buyer when you want to put cash in the bank. That limitation would not work for me at all.

Another problem is that many homeowners who lose their properties, aren't interested in staying as renters, according to William Apgar, senior mortgage advisor for the Department of Housing an Urban Development.

The program could have an unintended consequence. Lenders would feel pressure to shed properties to avoid becoming a landlord. Investors, who would have to give up some property rights, would low-ball lenders or not buy the house at all. The result could drag down housing prices even more.

Some investors think it could be a hit…. because investors would buy the home with a long-term tenant and steady revenue source. Lenders will like the plan because they'll be able to find buyers faster. Homeowners would be happy because they'll have a secure lease and not have to foot the bill to move.

"We don't yet know fully how the plan would work," said Mike Larson, a real estate analyst with Weiss Research. "But if you have a warm body in the house who will keep it from going into disrepair and keep the lawn mowed, that will be at least somewhat helpful."

I see his point, but really cannot swallow our free market property rights limitation. What do you think???

Tagged as: foreclosed homes