For policymakers and banks, the need of the hour therefore is to restore a semblance of confidence in the market and encourage home buying. Especially so now, because most economists and mortgage experts have opined that American home markets are bottoming out and that this could be the start of a recovery.
However, a recent and supposedly creative “owner to renter” scheme announced by Citigroup and Bank of America aims to do just the opposite. The irony is that the main purpose of this scheme is to help people struggling with mortgage repayments.
According to Citigroup’s scheme, Carrington Capital Management, a leading mortgage company, will check Citigroup’s portfolio of clients and filter out borrowers whose mortgage outstanding exceeds the market value of their homes. Then, Carrington will further refine this list and ferret out people who are behind on their mortgage payments by at least four months. The other condition is that these defaulting people must be living in their borrowed home.
Next, Carrington will approach struggling homeowners (as described above) and offer them a deal in which they can transfer ownership of their homes to Carrington and its associates. In exchange, the homeowners will be allowed to lease their ex-homes for a monthly rent determined by market conditions. The period of the lease also would be mutually negotiated.
According to Carrington and Citigroup, the scheme is beneficial because
(a) Struggling homeowners can get rid of an asset whose market value is lower than the debt obtained on it
(b) They can save cash by paying rent, which will be lower than the mortgage payment.
However, what is being left unsaid is this:
- A homeowner and his family will be deprived of their home. Owning a home is every American’s dream; getting his home snatched away right under his nose and then being asked to become a tenant in his very ex-home, can be a American nightmare. The homeowner will feel that his rights have been violated if his home is taken away from him.
- What will happen to the home if Carrington finds a buyer within or after the lease period? Will they boot out the original homeowner? The fine print is not clear on this point.
- Many homeowners blame the housing crisis on banks. Banks lent money to subprime borrowers, thereby creating an artificial price rise. Then they lured buyers and offered easy money to just about everyone. Americans saw home prices rising and wanted to own their homes before prices rose any further, and so they obtained loans. then came the crash. many homeowners blame the banks for their plight, though this is debatable.
- Citigroup’s scheme will actually benefit (if you can call it that) only 500 buyers across 5 states. That’s 100 homes per state. Can that ever be considered beneficial for the market? No way!
- The homes are being snatched away at a time when the housing market has bottomed out. How will the homeowner feel if prices rise a month after he turns into a tenant?
So, what should Citigroup and Bank Of America, whose scheme is similar to Citigroup’s, do?
Well, they should encourage the homeowner by offering him a lease option. They should sit across the table with him, calculate the number of payments he has made on his mortgage so far and lump the principal with his original down payment. Next, they should offer him a lease option and ask him to make a second down payment after two or three years.
This solution will allow the homeowner to live in his home, and keep it too. He will be safe and secure in the thought that he can do something big to make his second down payment and then own his home. It will spur his entrepreneurial ability! Such creative steps will not only help the homeowner, they will help kick-start the economy too.
A housing turnaround is key to reviving our economy and banks must get helpful with creative schemes. If they take away homes, it will discourage Americans and drive them further downhill.
So, this is a plea to all our banks and financial institutions to help us retain our homes by converting probable foreclosures into lease options.
This will help us own the economy, not rent it for a brief while.