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Foreclosure Conversion to Lease

Protect the Mortgagor (Homeowner) from homelessness while simultaneously generating income for cash-strapped banks
  (+2, -3)
(+2, -3)
  [vote for,

Banks which accept government funds (bailouts) should be forced to convert foreclosed mortgages into leases. This seems like a win-win-win. The homeowner is not forced out into the street. The bank would collect income from a property that would most likely sit in an over-surplussed market. And the government would fulfill its promise to help the homeowner while simultaneously bettering its chances of being paid back by the bank. As foreclosures increase at a record pace, banks are left with depressed properties that either sit unsold, causing the bank to throw good money after bad in the way of RE taxes, insurance and maintenance or are sold at a price which doesn't cover the loan amount (toxic notes that the gov't now owns.) The properties are generally reduced in value by not only the economy but also through intentional property damage inflicted by frustrated homeowners forced to vacate their homes! If the banks were mandated through a government program to convert foreclosed mortgages into leases, they would have ready tenants to at the very least defray expenses. The property wouldn't be damaged by an angry occupant. The government could share in the rental income as pay-back for the bailout. All the while, the property is given the opportunity to increase in value should the market turn around.
raysparro, Feb 28 2009


       This is already done, though not mandatory, here in England. If a house is involved, though, more income could be derived by converting it into bedsits and renting them out. I can't remember the figures, but i once lived in a house which was sold and converted. The price for which the house was sold would have been recouped in rent within two years, although the cost of conversion would have been high. If that cost was equivalent to the whole price of the house, which i think must be an overestimate or it would be cheaper to buy a ready-converted house, it would pay for itself within four years.   

       The going rate for rent on this house is such that it would take seventeen years to pay for it that way at the price it was bought. That doesn't take maintaining it into account. That implies that it doesn't make sense for the bank to do it unless it charges much higher rates than the market rate. Since the residents are likely to be unemployed, in this country they wouldn't be reimbursed for the rent above the market rate, and in reality even for a fraction of that. Therefore, only the likes of a credit union or Triodos would be prepared to do it, and they would go bust if they did.   

       So sorry, nice thought but [-].
nineteenthly, Feb 28 2009

       I like the idea of this - in that it opens a way for people who are in debt to escape homelessness, hence [+]. However I do not believe it to be more than a sticking plaster on a horrid and greedy system.   

       People being made homeless because they are unable to meet payments on their home really is something unfair which should not be part of a modern society. First of all, someone is paying towards a house which they cannot afford; so the question must be whether they need a house of such a value or if they would be able to live acceptably in a smaller or cheaper house. If a cheaper house would be suitable, then the bank should assist with the downsizing through payment breaks, waivers of mortgage fees and automatic approval for suitable properties. If the person needs the house (due to working in an expensive area, having a large family, there not being a cheaper house etc.) then I'm afraid it is the duty of society at large to either find a way to depress house prices in the area or boost the income of the person affected. I do not believe there is ever a situation from which a housed person should be made homeless through debt.
vincevincevince, Feb 28 2009

       since many houses of I assume various prices are involved, why not just move everybody downwards into houses they *can* afford, convert the very top houses to boarding houses and move the very bottom refugees there.
FlyingToaster, Feb 28 2009

       I agree with you, [vvv], and i'm torn between what i see as realism and what i see as idealism on this one. I understand the British situation is unusual, but this is how i see it:
Pre-war: Normal to rent houses from private landlords.
War: Destruction of housing through air raids.
Post-war: Councils built new housing and demolished much of the old, so they became the landlords, but there was also more home ownership.
More recently, people bought their homes off the council, or so they thought. A better description is that banks and building societies now own the houses and people rent them off them, but suffer the false belief that they own them. They don't own them but are effectively the tenants of the banks and building societies, except that they have to pay for maintenance so they're actually worse off than tenants. They can be evicted if they don't keep up on their mortgage payments, they end up paying more than the original value of the house and so on. How is that different than rent?

       You said "the bank should...". Any statement of the form "the bank should X" entails the statement "the bank does not X". That's my point.
nineteenthly, Feb 28 2009

       Perhaps the problem lies in the fact that the banks exist in order to make money, not help people. Maybe the government should buy foreclosed homes and lease them to lower income families. There would still have to be a contract or the tenants could easily take advantage of the situation. Tenants must conduct basic maintenance and upkeep. After a successful lease period (yearly inspections) that gives the government 30% back of what they paid for the home, the tenant would have a 25% ownership stake, etc., until the tenant owns it outright. The government would recover its money, but would be very flexible with the tenant terms. Just a thought.
saprolite, Feb 28 2009

       [saprolite] //Perhaps the problem lies in the fact that the banks exist in order to make money, not help people// ... I couldn't have said it better myself.
vincevincevince, Feb 28 2009

       Again, there's a problem here because the situation differs between countries and i can't speak for somewhere outside England and Wales. Property law and the method by which unpaid debts are settled differs in Scotland and as far as i know they still have the Schemes. There was a time when the same situation existed here in England. However, a couple of decades back a lot of people bought their own council houses and new housing schemes here are private. No matter how popular the idea of the government buying houses here is, they'll just say they can't afford it and they won't do it. The time when that sort of thing happens is gone forever. It can't happen because it wouldn't profit the private sector.
nineteenthly, Feb 28 2009

       //Perhaps the problem lies in the fact that the banks exist in order to make money, not help people.//   

       This can't possibly be the problem. Everybody expects and needs to be paid for their services, and it's not unreasonable for people to seek the most lucrative investment they can find for the money they're setting aside for retirement.   

       However, there's still something very wrong with a foreclosure that results solely from the value of one's property declining, especially if the decline in value is attributable solely to other similar foreclosures.   

       At the bottom of this is a bunch of crooks, for sure, but most banks and most bankers are not guilty. The crooks are the folks who sold credit- default swaps (i.e., insurance policies) without enough capital to pay off. These guys are crooks simply because they sold something they didn't own.
colorclocks, Mar 01 2009

       Even crooks think they're doing the right thing. The problem is not individuals.
nineteenthly, Mar 01 2009

       The problem *isn't* soley because the value of the houses has declined, though that's a factor.   

       The housing crisis has two distinct causes, which combined in a horrible synergy:   

       Firstly, the banks made bad loans of a certain type: the inital interest and loan payments were small, and then reset to a higher rate, and higher payments, after a certain time. People who accepted these loans did so with the belief that by the time the rate increased, they'd have gotten raises. When house values were rising, anyone who made such a loan but didn't get their expected raise simply sold the home to pay off the mortgage, and moved someplace cheaper. It was unfortunate, but not the end of the world.   

       However, once houses started dropping in value, selling the home to pay off the loan became impossible, since the home sale would result in less money than the loan was for.   

       Obviously the problem would have been avoided if the banks hadn't made those loans, or if the housing market had continously and forever considered to rise.   

       But since nothing lasts forever, it was inevitable that the housing market would decline...
goldbb, Mar 01 2009

       I heard an NPR story about a group that is buying the mortgages from the bank at their current value, which is of course well below face value. They are then going to the home owner and working with them to work out a new payment plan, at the current value (plus a small profit). If the homeowner still can't afford it, they are attempting to offer a lease back to the homeowner so they can at least stay in residence. They can't do this with everything, only where they can actually track the individual mortgage, and I'm sure there are some situations that are so bad that they can't even do this, but it does sound like progress in the right direction.
MechE, Mar 01 2009

       This is why optimism is a mental illness, [goldbb]. I wonder if it could be treated pharmacologically.
nineteenthly, Mar 01 2009

       I like the idea of the government buying loans at full value backed by real estate at market value and not the value stated for the loan. In this way, the Government will foreclose then sell the foreclosed property at a loss, ie at market value. In this way, the banks can relinquish their hold on foreclosed property to the government instead of keeping them out of the market, awaiting an uncertain furture that the market value of the property will rise to the loan value.   

       Who said that bankers are dumb?   

       el dueno
el dueno, Mar 02 2009


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