The Foreclosure Problem Could be Solved by Adopting the Rental Model

May 13th, 2009 | Tags: Foreclosure

One of the many suggestions coming forth in the wake of the housing crisis is that the foreclosure problem could be solved by adopting the rental model. The former mayor of Greenport, David E. Kapell has come up with a plan to tackle the issue. He is the founder of Kapell Real Estate & Antiques.

The credit freeze has come to stay since July 2007 without showing any signs of thawing. Neither the public nor the private sector has been able to show any results following the various schemes that have been launched. The moot question is about the pricing of the toxic mortgage backed securities being held by the banks and other financial bodies.

The first thing is that any solution should involve the minimum involvement of public money. It is only then that the confidence and trust of the people be restored. Otherwise even with money in their pockets the people will not spend and investors will not invest.

The credit freeze has happened following the evaporation of the artificially created demand and fueled by money coming from dubious sources. The housing crisis has given rise to an increase in demand for rented accommodation. The irony is that this need for housing has been juxtaposed on a vast number of vacant derelict foreclosed houses. The people need shelter. The shelters badly need occupants. In a perverse way the law and society is not allowing the two needs to coalesce.

The root problem of recapitalizing the collapsing banks is placing the right price of the toxic securities that are polluting their books. Making an estimate is nearly impossible in the market where value of property is dropping nearly every day. The problem is mired is insufficient data about the recent sales – an important ingredient to access the value of property in most parts of the country.

In sharp contrast the rental market is stable and there is plenty of data available to appraise the value of the house based on the rent. The federal government routinely collects as well as publishes the data of fair rent collected from all part of USA. This is being used by the government to execute its housing as well as rent subsidy measures.

If banks took the similar approach and based the calculation of the valuation of the house on the prevailing rent then buyers would be induced to make purchases.