Last week Congress finally passed its long-debated housing bill. In addition to securing the multimillion-dollar salaries of the top executives of Fannie Mae and Freddie Mac, and protecting their shareholders from facing the full consequences of their bad stock picks, the bill also provided funds for guaranteeing new mortgages for homeowners facing foreclosure.
The bill allows lenders to bring failing mortgages to the Federal Housing Authority (FHA), which will guarantee a new mortgage at 85 percent of the current appraised value of the home. The Congressional Budget Office (CBO) estimates that lenders will bring 400,000 mortgages to the FHA over the next three years. CBO expects that 140,000 of these mortgages will go into foreclosure a second time, leaving a net of 260,000 homeowners who will hang onto their homes as a result of this program.
By contrast, there are likely to be 2.5 million to 3 million foreclosures in both 2008 and 2009. This means that the housing bill will likely help less than five percent of the families facing foreclosure over the next two years, leaving 95 percent of this group out of luck.
Fortunately, there is something very simple that Congress can do if it actually wants to help families facing foreclosure. Representative Raœl Grijalva has proposed a bill, the Saving Family Homes Act, which would allow many of these homeowners to stay in their homes. It requires no taxpayer dollars and no new government bureaucracy, and it can begin to protect homeowners as soon as the bill is approved by Congress.
The bill temporarily alters the rules on foreclosures. It allows homeowners facing foreclosure the option to stay in their home as renters paying the fair market rent. They would be allowed to remain in their home for up to 20 years. The bill would only apply to homes that were purchased for less than the median price in the area. This ensures that it only benefits those most in need of help, rather than millionaires who made bad bets in the housing market.
There are two main benefits from this proposal. First, it will provide housing security to millions of homeowners who would otherwise be forced out on the street. If a family is happy with their home – they like the neighborhood and the schools – they would have the option to remain there as renters. This prevents the property from standing vacant, which is a benefit to both their neighbors and the local government.
The second benefit is that it is likely to lead to a situation in which many of these families will be able to stay in their home as homeowners. By giving homeowners the option to remain in their home as renters, the Grijalva bill changes the calculation for lenders seeking foreclosures. Banks will no longer have the option to use the foreclosure process to throw families on the street and then resell the vacant house.
Instead, banks will face the prospect of having a long-term tenant. In general, banks are not interested in becoming landlords, so this will not be an attractive option. Banks will of course still be able to sell the foreclosed property, but the former homeowner would still have the right to remain as a tenant. And a property with a tenant attached will command a much lower price than a vacant home.
In short, the Grijalva bill makes foreclosure a much-less-attractive option for banks. It provides them with a real incentive to try to work out a new payment schedule with homeowners that will allow them to remain in their homes as owners.
Since the change in rules on foreclosure is temporary and limited, it should have only a minimal effect on lenders’ willingness to make new loans in the future. Furthermore, if it raises concerns in the future among lenders over the risks of making loans in a bubble environment, then this would be a further benefit of the bill.
The structure of the bill is designed so that the beneficiaries will be overwhelmingly moderate-income families and actual homeowners. A speculator will not benefit from the option to stay in a home as a long-term tenant paying the fair market rent.
So, if Congress is interested in helping homeowners after its heroic efforts on behalf of Fannie and Freddie’s shareholders and management, it can approve the Grijalva bill. It would almost certainly do more to protect homeownership than the bill passed last week.