Right To Rent: Will The Obama Administration Finally Fix Housing?

The concept of "right to rent" has been floating around Washington for almost four years. Under this proposal, foreclosed homeowners would be allowed to remain in their house as renters, paying the market rent, for a substantial period of time (e.g. five years) following a foreclosure. While several bills have been introduced in Congress, President Obama may now have a new opportunity to take the lead on this issue.

The overwhelming majority of mortgages that have been issued since the financial meltdown in September of 2008 have been bought by Fannie Mae and Freddie Mac or insured by the Federal Housing Authority. This has led to an interesting, but predictable, outcome. The most recent data indicate that more than half of the new foreclosures are on houses where Fannie and Freddie either hold the mortgage or have insured the mortgage-backed security in which it sits.

Rather than being a problem for banks to deal with, the problem of foreclosures is now primarily a government problem, since the federal government now owns and controls Fannie and Freddie. This means that President Obama no longer has to beg the banks to allow people to stay in their homes. He can do it himself. And, he can show the banks how to do it right.

The main objection the banks continually raised when they were urged to make modifications rather than foreclose, was the one of moral hazard. If homeowners know that they can get both a lower interest rate and a big principle write-down by missing a few mortgage payments and pleading poverty, then you are giving them an enormous incentive to go this route. Millions of homeowners who are able to pay their mortgage will instead opt for modifications.

The banks did have a point on the policy side. While some of the mortgage debt was held by banks, mortgage-backed securities held by a wide range of investors including pension funds, mutual funds with 401(k) investments and university endowments. It's not obviously good to make these investors take a hit. And even with the banks, if their losses lead to more bailouts, it's the taxpayers who take the hit.

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