Another Plan To Fix The Housing Market: Rent-To-Own

A few days ago, Reuters reported that the Obama administration is considering another plan to stave off foreclosures: Rent-to-own.

(The administration's original plan--mortgage modifications--has so far been a disappointment).

The goal of the program would be to reduce foreclosures and keep people in their houses - by reducing their monthly payments and eliminating the crushing burden of debt on homeowners that underwater.

Reuters reported few details about what, exactly, the administration is considering, and with rent-to-own, the devil is in those details. For example: Does the bank have to become a landlord? Can it sell the house? What will the rent be? How will the bank handle the writedown?

Our guest Dan Alpert of Westwood, has proposed a version of rent-to-own that works like this:

The homeowner is given an option to give his or her house to the bank in exchange for a 5-year lease (at market rates) on the property. The homeowner must be able to decide singlehandedly to pursue this "deed for lease swap", or the banks won't agree to it.
The bank takes over ownership of the house and rents it back to the homeowner for the lease term, at which point the homeowner has the option to buy the house back at fair market value.
In this video, Dan explains the details of this proposal. The big drawback, from the bank's perspective, is that the bank would have to take the loss on the mortgage right away, which most banks are desperate to avoid doing.