Solving the mortgage crisis for the historically ignorant

Dean Baker in the Guardian:

Congress could approve a temporary change to the rules governing the foreclosure process. This change would give homeowners facing foreclosure the right to stay in their homes, paying the market rent for a substantial period of time (eg seven to 10 years).

So, what we should do is make people the latter-day equivalent of tenant farmers? As awful as the relationship can be between mortgagor and lender, it is not a  zero-sum relationship. Landlord-tenant, on the other hand? Especially with a rent cap like this, the landlord will just do whatever needs be to kick the tenant out if a higher rent can be got from a new one.

Anyone familiar with economic history—or even just American history—might recognize this as the phenomenon that gave rise to the populist movement in the late 19th century. Farmers were getting screwed by bankers and losing their land. So, now instead of farmers, we have the post-ww2 middle class homeowner.

The easy solutions to this problem disappeared in 2007 when we could have bailed out the homeowners instead of the banks by preventing the defaults that setup this domino effect. That time has passed. Now, to me, the best solution is to allow residential property to be “crammed down” in bankruptcy.

Yeah, I know the counterarguments about a runaway effect on the market. But isn’t that what already happened? The simple solution is to make the bankruptcy painful enough so that it’s only done as a last resort. As it stands right now, it’s not far from that.

Too bad the banks run Washington.

P.S. Oh, and then there’s the various blame the victim arguments that go together with saying that the burden will be passed on to other ‘responsible’ homeowners. Well, just work out a way to keep that from happening. Other homeowners might suffer a slight diminution in value, temporarily, but is it worse than a bunch of empty houses, or, worse, according to property value mavens, a bunch of rented homes where the tenant has no stake in it? And about the interest rates? Well, ‘responsible’ homeowners would have a fixed rate or a loan already. Future buyers, duh, will like the lower values and interest rates are low. What’s the problem?

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