By Dean Baker
It is encouraging to see that Bank of America is experimenting with a pilot program that would allow up to 1,000 foreclosed homeowners to stay in their homes as renters for up to three years. This is a simple and obvious solution that offers substantial benefits to homeowners and communities and could quite likely benefit lenders as well.
The basic point is simple. Giving foreclosed homeowners the option to stay in their homes for three years will give them a substantial degree of housing security. While a longer period of time would be desirable (a bill in Congress provides for five years), three years should be sufficient in many cases to allow for homeowners to adjust to the loss of ownership of their homes. Children may complete school and they may be able to rebuild their finances so that they are in a position to find other rental units or purchase other homes, possibly even rebuying their own homes.
This is clearly preferable from the standpoint of communities that have been hit by the blight of foreclosure. The rental option keeps the homes occupied. Furthermore, a former homeowner with a long-term lease will have a motivation to maintain the property so that it does not become an eyesore, pulling down property values.
It is quite likely that this rental option will even prove advantageous to lenders. There are substantial transaction costs associated with evicting former homeowners and selling off repossessed homes. During the period in which a home is left vacant it will generally not be properly maintained. It may even be vandalized by scavengers looking for copper pipes or anything else of value. Incurring these costs only to sell a home in a depressed market virtually ensures large losses.
By contrast, keeping a former homeowner in their home would maintain a stream of rental payments. The lender can then look to sell the home a few years down the road when, at least in some markets, prices are likely to have recovered.
It is encouraging that Bank of America has decided to pursue this rental option on its own. It would have been desirable if Congress had taken steps to require lenders to offer a rental option to foreclosed homeowners. This is a simple form of relief that would have been costless to taxpayers. It would also be desirable for Fannie Mae and Freddie Mac follow the lead of Bank of America and ease and extend the terms of their foreclosed homeowner rental option programs for the homes under their control.
It is unfortunate that it has taken so long for people in policy positions to adopt such a simple and obvious measure. However, the success of Bank of America’s pilot project should lead to its wide expansion and eventually offer substantial benefits to millions of homeowners, their families and communities.