Monday, October 27, 2008

Mortgage defaults: the Right to Rent

The Green Party needs to develop the excellent Right to Rent policy passed at the last Conference.

In essence, anyone in a modestly priced house who becomes unable to pay the mortgage can transfer to a rental basis. The householder pays an affordable rent, and gets to stay in the house, while the mortgage lender gets to own the property instead of a bad loan. Win-win solution. It has a strong bearing on the financial crisis, since the housing bubble, followed by its deflation, is at root of the crisis, and the bank capitalisation problem. The banks’ debts from housing defaults have been multiplied to threatening levels by the derivatives scam.

We need to think about the details of the right to rent. The problem is that banks will not feel ecstatic about owning houses that are worth less than the mortgage debt outstanding. It will further strain their balance sheets, and further decrease their willingness to lend.

So how would it be if Government buys the houses? At what level? Present house values, or face value of the mortgages?

Market values have been shown to be illusory, and it is the dissocaition between market values and notional financial values that is at the root of the current mess.

I suggest real valuation, based on the cost to rebuild a house of equivalent size, weighted by the age, site and condition of the house.

In buying them, we would of course be re-nationalising the housing stock, and also making the outstanding debt in the financial system less threatening.

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