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Uncle Sam Wants You! – To Rent from Him

Today, we are again honored to have Ken H. Johnson, Ph.D. — Florida International University (FIU) and Editor of the Journal of Housing Research as our guest blogger. To view other research from FIU, visit http://realestate.fiu.edu/. Dr. Johnson will also be speaking at NAR’s Conference and Expo in Anaheim. For more information click here. The KCM Crew

On August 10th, The New York Times reported: “Uncle Sam wants you — to rent a house from Uncle Sam”.  The gist of the story is that the Obama administration is seeking ideas on how to convert the federal government’s inventory of foreclosed properties into rental properties that can be managed by private enterprises or sold in bulk.  The goal here is to stabilize housing markets around the country that are suffering through a wave of foreclosures.  Today, rumors of turning foreclosures into rentals are surfacing again.  Is this a good idea?  If so, how should such a program be organized and managed?  What are some of the potential downfalls of such a program?

To begin with, this is, in general, a good idea for a number of reasons.  First, vacant non-performing assets (empty properties) will begin to provide returns and thus mitigate total eventual losses to lenders and thereby lower the tab to all.  Second, the program should slow down the flood of foreclosed properties and should help stabilize pricing as traditional home sellers will now have fewer foreclosures to compete against.  Third, the program would allow lenders (Fannie, Freddie, and others – perhaps the original lender) to time the selling of foreclosed properties, which would assist in stabilizing the housing markets around the country. 

If turning foreclosures into rental happens, what should not be done?  Renting to the previous owners should not be allowed as this would create significant conflicts of interest, which could easily lead to a deluge of lawsuits resulting in the failure of the program.  Additionally, social engineering should not be allowed.  Let the marketplace decide rent levels.

Where might problems arise from turning foreclosures into rentals?  Though they are very similar, foreclosure laws vary by state.  One general commonality among the various laws is that the lender must mitigate the loss to the previous owner through a timely resale of the property.  These laws can be thought of as the Milton Drysdale deterrent.  It is simply not in the best interest of society to allow lenders to foreclose on property, ride out the tough times, and then resell at a huge profit.  However, these laws never contemplated a situation where foreclosures would be as rampant as they are at present.  Regardless, if the federal government, through Fannie, Freddie, joint ventures with outside investors with Fannie and Freddie, or even the original lenders themselves, becomes a landlord looking for a better environment in which to sell, the likelihood of lawsuits over violations of state foreclosure laws is almost certain.  That is to say, we will probably have “Robo-signing II”.  Thus, the big question is will Congress be willing to back turning foreclosures into rentals with a federal law that overrides state foreclosure statutes. 

Four years ago, I told a graduate audience that banks should get ready to manage property in order to mitigate losses from the coming real estate crisis.  However, state laws would probably prevent this and that federal legislation was needed to allow for lenders to manage and/or re-sell property in a way that balanced market stabilization with mitigating losses to the original owners.  Is turning foreclosures into rentals a good idea?  Yes, the idea is sound.  The only surprise is that it took this long to get around to considering this eventuality.


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4 replies
  1. Joe
    Joe says:

    Renting would be an excellent idea for everybody! There is no shame in renting instead of “owning”, and most “experts” would agree that it is cheaper to do so.
    Let’s start with the Veterans coming back from War. If a Veteran has a job or is a “20 year Veteran”, with a retirement pension, we should offer the rentals to them. At the same time, REALTORS are not making many sales right now, so the Realtors should be given the first opportunity to manage the properties and rent them, so that Realtors can make some money again. An “Independent” property holding company should be created by the Banks to hold, repair, manage, and rent the properties throught the Realtors. These properties should be “marked down” 20 to 25 percent while they are already rented, to create a real interest (no pun intended) from all individual investors to buy these properties.

    Reply
  2. Debbie Drummond
    Debbie Drummond says:

    I have a real problem with this. In Las Vegas, we are already seeing foreclosed homes that are turning into rentals. A large number of our monthly transactions come from investors who are buying homes, putting money into restoring them and putting them into the rental market.

    If the feds try to take over the properties, they will be in a position to rent without worrying about cash flow. Also, we run the risk of seeing the government paying $200 for that light bulb that needs to be replaced, where the private investor is going to buy them on sale at Home Depot or Walmart…

    Unfortunately, this crisis was caused in large part by politicians who were so anxious to increase homeownership that they forced lenders to come up with creative financing. Private investors are putting their own money at risk by paying cash or putting at least 20-30% down plus the improvements they make to the home. In putting their money at risk, the private investors are showing a tremendous amount of faith in our housing market’s eventual recovery. We should keep the government out of the rental program and let the free market work through this.

    Reply

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