Rent Regulation for Subprime Foreclosures?

Dean Baker writes at TMP Cafe:

Last week I floated the idea here that the best way to rescue subprime borrowers struggling to hang onto their homes is to allow them to become long-term renters, paying the fair market rent. This idea got a positive response from dozens of people, including Calculated Risk, a blog that focuses on finance and economics, and the blog Vox Baby, which is run by Dartmouth economics professor Andrew Samwick, who had been a top advisor in the Bush administration.

Given the importance of the issue, and the fact that the main alternatives seem primarily designed to bail out banks and hedge funds, I thought it was worth filling in some details.

Here’s how the plan works. Currently, if a homeowner is not able to make their mortgage payments, the holder of the mortgage can go to court to place the house in foreclosure. At that point, if the homeowner is not able to come up with back payments on the mortgage, or work out an acceptable arrangement with the mortgage holder, the bank or financial institution that holds the mortgage retakes ownership of the house and can have the homeowner evicted.

Under this security of housing proposal, the foreclosure process would be changed so that the current homeowner would have the option to remain in their house as a renter paying the fair market rent. If a homeowner chose to go this route, the judge in the foreclosure proceeding would appoint an independent appraiser to determine the fair market rent for the house. This is similar to the process a bank undertakes when it hires an appraiser to determine the value of the house before issuing a mortgage, except the appraiser will be asked to determine the rent rather than the sale price.

The former homeowner could then remain in their home as a renter for as long as they liked. The rent would be adjusted at regular intervals in step with the change of other rents in the area. There could even be an appeals process in which either party could request that the judge get a second appraisal, at the expense of the person complaining about the original appraisal. This should ensure that the rent set for the house is fair.

His proposal has its merits, and he's correct in claiming that it's one of the few designed with the interests of residents, rather than lenders, in mind. He loses me, though, with his suggestion that a third party "determine the fair market rent."

Doesn't the market determine any market price by definition? And if our goal is to secure the stability of families and communities, should the market really be our ideal? Those of us in hot, unregulated housing markets have seen how well that works.

Perhaps basing the initial rent on a borrower's pre-adjustment mortgage payment, then predicating future increases on a number of factors beyond market prices, as do New York State's Rent Guidelines Boards, would make more sense?

Rent regulation is the social acknowledgment of a housing crisis that the market cannot resolve. Pointy-headed number-crunchers may be necessary to weigh and compare the precise correlations between incomes, rents, evictions, and homelessness, but the market can certainly determine a market price on its own. That is, after all, what it does.

The key questions: How many of the working-class families targeted by subprime lenders could afford market rents in their current neighborhoods? My guess is few; sleazy brokers promised many of them that their mortgage payments would be lower than their previous rents, and prior to adjustment, that was probably true. It logically follows that they live in communities with market rents beyond their means.

And would flipping houses from a poorly-regulated mortgage market to a poorly-regulated rental market, as Baker apparently suggests, accomplish anything in the long run? Or should those of us who advocate and organize for permanently affordable housing build upon his proposal by demanding a more rigorous form of regulation, similar, if not identical, to that currently enjoyed by rent-controlled and rent-stabilized tenants?