Foreclosure Crisis: A Demand-Driven Solution

A Letter to President Barack Obama

Demand Driven Solution for the current housing foreclosure crisis: Using Rent-to-Own Mortgages to combat the foreclosure problem and stabilize the housing market.

Dear Mr. President,

In finding a solution to the current foreclosure problem, the government should be concerned with some of these questions:

1.    What measures would help the people already in foreclosure without encouraging those Americans who are still paying their mortgages promptly to default on purpose to qualify for principal-reduction or rate/term modification?
2.    Which measures are more likely to halt the steady price decline in the housing market and stabilize the market?
3.    Which measures would be most effective and transferable to the private sector?

I tried to answer those three question with the idea of government backed Rent-to-Own Mortgages.  In which people that are currently facing foreclosure could qualify to access the money to buy back their property from the Bank through the rent-to-own mortgage.  

I believe that this little idea could be helpful in assisting your team to find effective solutions to our current housing foreclosure crisis.  If applied, a Rent-to-Own Mortgage program would discourage people from manipulating the system by defaulting on purpose, while it gives immediate help to those families loosing their homes.

Before going further, I want to introduce myself to you.  I am 37 years old economic and financial professional currently serving as the Chief Financial Officer of a Los Angeles based community development and housing service organization.  A non-profit dedicated to building affordable housing, providing community sensitive lending, and helping stabilize communities through pre-purchase and post-purchase homeowners' financial education.  I have actively worked in the financial industry for the past 17 years.

While my lengthy financial industry years don't make me a unique expert on finances, my hands-on experience helping this community development and housing service organization does.  In the past 21 months, I have witnessed the organization help more than twenty thousand homeowners navigate through foreclosure either getting their loans modified, doing short-sales, or accepting foreclosure and relocating into rental properties.  

Housing is a basic necessity to every American family.  Whether they are buying or renting the properties, every American family needs housing.
 From experience trying to relocate families displaced from their homes, I realized that demand for rental housing in this market has skyrocketed in many areas of the country.

Looking at the market within the areas our clients wanted to relocate, we found a serious shortage of rentals but an abundance of REOs (foreclosed properties).  This fact is the main basis for the idea I am going to present in this letter - rent-to-own mortgages provided to all Americans utilizing the TARP II funding.  

While the demand side of housing-purchases has been declining speedily, supply for housing keeps increasing (with many banks' balance sheet seriously burdened with REOs).  The same cannot be said about the demand for rental-housing because it has increased significantly while supply of same has remained constant.  This risen demand for rental properties across the nation now presents the government with one singular opportunity to step in and satisfy this demand while at the same time stimulating demand in the housing market through a federally backed "Rent-to-Own" mortgage program.  

Rent-to-own Mortgages:
This mortgage should be offered through HUD, Fannie, Freddie, or other agencies; and should offer the mortgages through non-profit housing service organizations throughout the country that would also be responsible for the "case management" part of the "rent-to-own" mortgage program.  These mortgages should be structured in a way to attract private capital into the program too by specifying reasonable parameters and guidelines that make it a profitable venture (even for the government) and do not reward irresponsibility by borrowers or homeowners.

Potential Impacts of this program:  
Some of the potential impact of this program apart from the fact that it would create millions of new jobs for property management, property rehabilitation, and financial and lending services jobs include the following:

1.    Neighborhood Stabilization (because it would prevent cases of abandonments, and neighborhood blights).
2.    Stabilizing the housing market (by creating market demand to absorb the increases in supply due to foreclosures).
3.    Preventing further foreclosures as banks and financial institutions copy from the government program and start their own programs that would transform non-performing loans on the balance sheet into performing current investments.
4.    Helping American families in trouble at their time of need by giving them shelter even when the whole system was against them.  

I do not believe that this alone is enough to solve the housing crisis or financial crisis; however, I think that it would be a reasonable approach that would require minimal sacrifice from the American Taxpayers and potent minimal social moral hazards.

Tags: bailout, banks, Economy, foreclosure, housing, obama, TARP (all tags)



Re: Foreclosure Crisis: A Demand-Driven Solution

Why would one of your goals be to halt the steady decline in housing prices?  Even though housing prices have fallen a lot, they are still artificially inflated.  Letting house prices fall to their true value is the best way to make houses affordable.

by markjay 2009-02-16 12:20PM | 0 recs
Re: Foreclosure Crisis: A Demand-Driven Solution

Thank you for saying this.  This is something that has been bothering me since the beginning of the whole mess.  No one says it out loud, so I just assumed I was way off base.  But it makes perfect sense to me.

by the mollusk 2009-02-16 12:45PM | 0 recs
Re: Foreclosure Crisis: A Demand-Driven Solution

My own feeling is that houses will get to their true value eventually.  It would probably take trillions of dollars a year to artificially prop them up forever.  Dragging out the day that that happens (a fall to true value) will likely just drag out the recession.

by markjay 2009-02-16 04:57PM | 0 recs
Re: Foreclosure Crisis: A Demand-Driven Solution

The reason why this is not discussed is because deflating housing prices will lead to additional huge losses for the lenders and owners.  No one wants to accept that the only way to correct this problem is to undo the havoc of the past ten years (crazy lending practices leading to artifically high prices for homes, etc.).  That means allowing  houses to be foreclosed upon (with banks and owners taking a loss) and selling properties to those in a position to buy but for prices and the scarcity of credit.  

by orestes 2009-02-17 08:07AM | 0 recs


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