- There is a simple and direct way in which the federal
government can help out millions of moderate income families struggling
to keep their homes. They can simply change the rules on foreclosure to
allow moderate income homeowners the option to remain in their homes indefinitely
as renters, paying the fair market rent.
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- This proposal would immediately give moderate income
homeowners a guarantee that they would not be thrown out of the street
because they cannot meet the terms of a predatory mortgage. It accomplishes
this goal without requiring any elaborate new bureaucracy and without requiring
a single dollar from the taxpayers. And this plan does not bail out the
bankers, hedge funds, and other financial industry types who were speculating
in mortgage debt.
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- Here's how the plan works. Currently, if a homeowner
is not able to make their mortgage payments, the holder of the mortgage
can go to court to place the house in foreclosure. This means that if the
homeowner is not able to come up with back payments on the mortgage, or
work out an acceptable arrangement with the mortgage holder, the bank or
financial institution that holds the mortgage retakes ownership of the
house and can have the homeowner evicted.
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- Under this security of housing proposal, the foreclosure
process would be changed so that the current homeowner would have the option
to remain in their house as a renter paying the fair market rent. If a
homeowner chose to go this route, the judge in the foreclosure proceeding
would appoint an independent appraiser to determine the fair market rent
for the house, in the same way that a bank hires an appraiser to determine
the value of the house before issuing a mortgage.
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- The former homeowner could then remain in their home
as a renter for as long as they liked. The rent would be adjusted at regular
intervals in step with the change of other rents in the area. There could
even be an appeal process in which either party could request that the
judge get a second appraisal, at the expense of the person complaining
about the original appraisal. This should ensure that the rent set for
the house is fair. After the foreclosure, the mortgage holder would now
own the house and be free to sell it to another person, but the former
homeowner would still have the right to remain as a renter, regardless
of who owned the house.
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- This program could be restricted to homes that cost less
than the median house price for an area to ensure that high income homeowners
do not take advantage of it. The program would also only apply to people
who lived in their homes, not investors. In short, it is a very simple
and low cost way to help moderate income homebuyers. It does not give them
any windfalls, but it can ensure that they don't end up being thrown out
on the street.
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- In contrast, the politicians are lining up with plans
that ostensibly protect homeowners, but would most immediately benefit
the mortgage holders who speculated in predatory mortgage debt. For example,
one popular proposal being circulated in Congress would vastly expand the
role Fannie Mae and Freddie Mac, the government created mortgage intermediaries,
in the mortgage market. This proposal would allow them to buy up hundreds
of billions of dollars of subprime and other mortgages that the private
sector does not want.
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- Of course, the private sector doesn't want these non-prime
mortgages because the default rate is soaring. If Fannie Mae and Freddie
Mac suddenly got in the market for this debt, those who are currently speculating
in these mortgages stand to make a fortune. It's not clear that the government's
largesse will necessarily benefit moderate income homeowners facing foreclosure,
but there is certainly a possibility that some of the windfall will trickle
down.
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- The point here is simple. We can design a mechanism that
will directly benefit millions of moderate income homeowners who are struggling
to hang on to their homes. Or, we can come up with schemes that will benefit
the banks and hedge funds who speculated in mortgage debt. Place your bets.
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- Dean Baker is the co-director of the Center for Economic
and Policy Research (CEPR). He is the author of The
Conservative Nanny State: How the Wealthy Use the Government to Stay
Rich and Get Richer (www.conservativenannystate.org). He also has a blog,
"Beat the Press," where he discusses the media's coverage of
economic issues. You can find it at the American
Prospect's web site.
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