California has been one of the hardest-hit states by the foreclosure crisis. There are many reasons for this - we were ground zero for the "creative" lending practices of the Bush years, as exotic and frankly stupid loans were offered to folks in order to blow an enormous asset bubble centered in the inland exurbs. When gas prices parked themselves above $3/gal in 2006 the bubble finally burst, leaving hundreds of thousands of households unable to pay their mortgages and leading to massive unemployment in the inland counties.
As bad as this has already been, the foreclosure crisis in California is likely to grow much worse in the coming months. Over at Daily Kos gjohnsit digs up some charts from the Boston Federal Reserve on the Option ARM, a popular loan in the mid-'00s that is now at the center of the rising number of foreclosures. gjohnsit discussed predictions that nearly 90% of Option ARM could wind up underwater before long. This would primarily impact us here in California, where the Option ARM was most commonly used:
Already we are seeing increased foreclosures in Orange County:
At the end of last month there were 8,108 outstanding foreclosure auction notices in Orange County, nearly double the total a year ago, and up 9% from June, reports ForeclosureRadar.com.
It's incredible that outstanding auction notices are essentially double a year ago. In fact, ForeclosurerRadar says actual foreclosures by month peaked in July 2008 with 1,444 houses and condos seized. So even though actual foreclosure totals by month have dropped, the inventory of potential foreclosures has continued to rise.
Foreclosures cause massive economic dislocation, and most folks realize government policy ought to be oriented toward their prevention. But so far those policies have failed. Banks have been given massive injections of public capital and are sitting on it. Cramdown legislation failed in Congress and Obama's measures have benefited fewer than 10% of homeowners facing a foreclosure. California's foreclosure moratorium merely postponed the inevitable.
So perhaps it is time for more dramatic solutions. Dean Baker has been talking about one of these for several months now, and in last week's Los Angeles Times, revived his concept of the the "right to rent":
It's time to try a new route for helping homeowners. There is a simple alternative: Congress can pass legislation that gives homeowners facing foreclosure the right to stay in their home as renters. This "right to rent" policy would require no taxpayer money, no new bureaucracy and could immediately benefit homeowners facing foreclosure.
The basic idea is simple. In recognition of the extraordinary crisis, Congress would give families that took out mortgages at the peak of the boom and are facing foreclosure the option to remain in their homes as renters for a substantial period of time -- five to 10 years -- while paying the market-rate rent. Earlier this year, Freddie Mac launched a similar policy, giving former homeowners the option to lease their recently foreclosed properties, but on a month-to-month basis. That was a positive step, but it does not give families the housing security they need....
Although they would lose ownership of their homes under "right to rent," the residents would be able to stay in their homes, neighborhoods and schools. This would provide families facing foreclosure with needed stability and housing security.
The concept is something of a cross between a triage and an intervention in the housing market. Baker believes that the "right to rent" would enable some to become long-time renters, which is an increasingly popular position among Californians as a strategy to wait out the crash while keeping a roof over their head. Given the costs to household bank accounts, to cities and neighborhoods, and even to the banks of people leaving their homes to foreclosure, there are sound policy reasons to want to keep people in their homes.
Dean Baker also argues the "right to rent" would help keep more people in their homes as outright owners, as banks would have new incentive to modify underwater loans since the renters have a right to stay in their homes.
There are likely some downsides to this and those ought to be explored. The most interesting effect would be a major - and as far as I am concerned, a welcome and overdue - shift away from a sole emphasis on homeownership to provide housing and economic security for Californians.
It is long past time for us to see renting as a desirable method to provide stability and savings for Californians. We have eviscerated rent control and allowed urban areas to make renting an insecure proposition. Given the sky-high costs of houses in places like San Francisco or Monterey (homes on my street still sell in the $700,000 range, although my rent is $1100) renting is the only way for many folks to live near their workplaces.
A "right to rent" could be a component of a broader policy shift away from pushing people to "drive until you qualify" and buy a home in Modesto or Moreno Valley and commute to their jobs in the coastal centers. That has been a utterly ruinous policy from an economic and environmental stance. It's time we explored rent as a solution to the housing crisis.
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