Own to Rent

"Own to Rent":

So, how bad an idea is this?

The plan would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes. They’d give up all their equity—if they have any—and future claims on the equity, in exchange for getting to keep their homes.

There are lots of problems with this idea, including havoc it would create in securitized mortgages, that it would make the housing market even more illiquid than it is, and that it would create a huge incentive on the part of even more borrowers to default. Think about it: now you don’t even have to walk away.

The idea isn't quite as crazy as it sounds on first hearing: Nicholas Taleb suggested a similar approach recently. However, his approach is much less punitive than this: the bank would claim a permanent stake in the house, in return for lowering the payments to something you could afford. (So, for example, the bank would always own 49% of your house; therefore, you'd only need 51% of the mortgate, and could make lower payments). That preserves not only your home, but your ownership of it. The bank doesn't become your landlord. It just gets a share of the sale of the house whenever it does sell.

If the moral hazard is the issue, though, the more punitive approach could be defended: it is good that you have to sign away all your equity, and all future equity, forever. That will keep everyone from doing it. After all, who doesn't want to pay half their mortgage costs in hard economic times?