The foreclosure crisis has been devastating. Families no longer able to afford mortgage payments are forced into bankruptcy, while banks find themselves with properties valued at less than the loan principal. Solutions proposed thus far have primarily focused on loan re-modification measures that only slightly relieve the financial burden for homeowners and frustrate lenders who are forced into less attractive loan terms. However, one solution not being discussed in congress may resolve the housing market slump while benefiting families and investors alike.
The reality for many homeowners is that they simply cannot make their mortgage payments; due to depreciating home prices, they are also unable to sell. Foreclosure sadly has long been the only way out. According to the Center for Responsible Lending, a home goes into foreclosure every 13 seconds. What if these same homeowners could somehow rent their current residence and thus avoid foreclosure altogether? An extremist approach would call on federal and state governments to buy properties nearing foreclosure and subsequently lease them out. A much better solution is to offer incentives to investors in order to transform distressed homes into attractive investment opportunities that will stimulate home sales, while simultaneously offering low rents to current residents – which can be appropriately called the Real Estate Investment Revitalization Program.
Although interest rates remain at historical lows, levels have been ineffective in promoting such a buy-lend approach. By additionally offering low-interest or even zero-interest secondary loans, however, REIRP would entice investors to take a buy-and-hold investment strategy since the risk of further depreciation would be partially offset by a reduced total interest expense on their investment. To take advantage of this incentive, investors would be required to lease the property to the current occupants for a period equal to the secondary loan term or until the occupants move out, whichever comes first. Additionally, the rent charged to the occupants would reflect the lower mortgage cost to the investor from the low-interest secondary loan received through the REIRP.
In cases where the mortgage amount is greater than the selling price, the former homeowner can apply for a new loan deferred for up to two years, subject to the homeowner’s ability to repay the loan. This provides distressed borrowers an opportunity to reduce their immediate financial burden and avoid bankruptcy by postponing payment on the remaining principle. Similar to how most school loans operate, this loan would accrue interest while in deferment, and repayment would begin after the deferment period ends. The borrower would also have the option to prepay at anytime with no prepayment penalties.
Opponents may argue that a plan with similar objectives already exists. The Deed for Lease program by Fannie Mae allows homeowners to exchange their deed for a lease...