July 14, 2009 / 7:42 PM / 10 years ago

Obama mulls rental option for homeowners: sources

NEW YORK (Reuters) - U.S. officials are weighing a plan to let borrowers who have fallen behind on mortgage payments avoid eviction by renting their home instead, sources familiar with the administration’s thinking said on Tuesday.

A woman drops her bag inside her family's home in Grand Prairie, Texas July 2, 2009. REUTERS/Jessica Rinaldi

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes, but would continue to live in the property for several years, the sources told Reuters.

A U.S. Treasury spokeswoman said late on Tuesday that “we are constantly reviewing new ways to help struggling homeowners and stabilize the housing market. This is just one idea among many that has been considered, but no decisions are imminent on the matter.”

Officials have been frustrated as red tape and rising interest rates have slowed a housing rescue plan announced in February that was meant to refinance the mortgages of 5 million borrowers and lower monthly payments for 4 million more.

A housing crisis of record defaults began in 2006 at the end of a five-year housing boom of easy lending. But the current crisis is being driven as much by climbing unemployment.

Since one in five homeowners owe more than their property is worth, they have little cushion if they lose their job or face another crisis, said Jay Brinkmann, the chief economist for the Mortgage Bankers Association.

“Foreclosure is a double trigger — does someone have a job and do they owe more than a home is worth?” Brinkmann asked.

On Monday, an administration official told Reuters that the Treasury Department is mulling new ways to save jobless homeowners from foreclosure as it continues to expand its mortgage aid.

The official told Reuters it was reasonable for policy-makers to consider terms for loan forbearance — letting borrowers delay, defer or skip payments — and that they should be in keeping with other aid for the unemployed.

A PLAN WHOSE TIME HAS COME?

Two years ago, a liberal economist floated the idea that struggling homeowners could become long-term renters. Dean Baker, a researcher with the Center for Economic Policy Research in Washington, says his idea still has merit and overcomes the key moral hazards of helping troubled homeowners.

“It is a very simple, clean way to help these people,” said Baker, who has discussed his idea with White House officials.

Under Baker’s plan, a bankruptcy judge would help determine a fair rent for the property. Banks would be able to sell the occupied homes, but the renter’s lease would remain in effect.

“Borrowers would lose their stake in the home so it is hard to say that they’ve gotten a windfall,” he said.

Officials are mulling several ideas on how to swap a homeowner’s loan for a rental lease without disrupting mortgage markets.

The government could pay mortgage service companies cash to take part in the program — or encourage lenders to sell the homes to a third party that would write rental agreements — under two scenarios under consideration.

Many non-profit agencies manage affordable properties and might be interested in partnering in such a rental program, said John Taylor, the president of the National Community Reinvestment Coalition.

“It could be a ‘win-win’ for the homeowner, the lender who has a troubled borrower and the non-profit,” he said.

Reporting by Patrick Rucker; Editing by Jan Paschal

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