Messing With The Market...Again

Bank of America's announcement the week before last that it was "experimenting" with an alternative to traditional foreclosure, that being taking a deed in lieu of foreclosure and renting the house back to the borrower, was greeted in some quarters as a bold new "pilot program." While that might be true for Bank of America, Fannie Mae rolled out a similar program three years ago and it has never generated much interest among homeowners. According to Fortune's Nin-Hai Tseng, that might be because Fannie Mae's servicers never put much effort into marketing this alternative or it might be because it's too difficult to qualify for Fannie Mae's program.

To qualify, borrowers must prove that they can take on monthly rent payments, which would be offered at the market rate. What's more, the balance can't exceed 31% of their gross income. In regular times, that might not be such a biggie – except the program targets homeowners in distress, who have either been tardy on mortgage payments or have stopped making payments altogether.

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If the bank's initiative is going to expand, it might have to be extra forgiving. Compared with Fannie's program, BofA's is somewhat more flexible in that it's open to offering leases at or below the market rate. A program overwhelmingly based on rentals at a discount may or may not work for the bank financially. And it remains to be seen if that will keep the program from expanding much beyond the three test areas.

There's another problem that Tseng notes: the number of markets where single family homes make attractive rental units is limited.

Aside from Las Vegas and parts of California, there aren't very many other places with high foreclosure rates and a robust rental market, says Jed Kolko, chief economist at Trulia, an online real estate site. Much of the overbuilding during the housing boom generally took place in suburbs and further out in rural areas, Kolko adds. However, the demand for rentals is occurring mostly within cities and urban areas.

A few years ago, an economist tried to drag me into an argument on this blog that also involved a leftarded, bank-hating blogger who accused of me of being an "elitist" because I thought the economist's idea of giving bankruptcy judges the power to force lenders to take a deed in lieu of foreclosure and rent the home back to the owner was dumber than a stump. The ensuing brawl in my comments box between opponents and proponents led me to first selectively ban certain antagonists and, finally, to shut down commenting permanently. This blog's a past-time, not a priority. I don't have the time to constantly police the comment moderation function. I've got a day job.

I admit that I'm an elitist, but when you're going up against ideologues and "committed" academics, it's difficult to maintain the proper degree of humility, because they consistently demonstrate that when it comes to factual impediments to their pet theories, they prefer to live in Cloud Cukoo Land, where all scenarios support their foregone conclusions. Keeping a sneer off your face is as formidable a task as not lusting after Catherine Zeta-Jones. It's possible, but not probable.

As Tseng's article illustrates, all of the alternatives to letting the marketplace work through the foreclosure backlog have limitations, not all of them work for every borrower or piece of collateral, and one size does not fit all. I wonder where we would be today if we had dispensed the search for the single magic bullet and quit jacking around with residential real estate. That's too much to ask in a world where so many have opinions and access to the internet is so readily available, and it's an impossible question to answer, but since so many public policy initiatives turn out to be misguided, I might as well engage in more idle speculation myself.