Felix Salmon takes issue with one of my criticisms of the Obama Own-To-Rent program. In my post I suggested that investors might just want to foreclose and sell the property to salvage whatever they could from a bad deal.

Felix retorts:

Let’s nip this one in the bud: there is nothing in this proposal which says that the owner of the property can’t sell it. Indeed, quite the opposite: Baker and Samwick write that “the mortgage holder is free to hold or sell the property as they choose”. Which in turn means there will be no havoc wreaked in securitized mortgages.

Banks, once they’ve foreclosed on a property, are still free to sell it, if they so desire, to the highest bidder. But the buyer of the house will have to continue renting it, at market rates, to its current inhabitants, until they either fall behind on their rent or move out. Which is no great hardship — that’s what landlords do.

There seems to be little consolation for the investor in that scheme. Let’s look a little more closely.

You can foreclose and you can sell the property but only as a rental and with a tenant in place. So, right away you’ve knocked out anywhere from 60% to 80% of the potential buyers depending upon investors’ appetite for single family rentals in any given area. Investors, being generally sophisticated buyers, will recognize that they are competing against a much smaller universe of buyers and will tailor their bids appropriately. Effectively, you would end up creating a separate class of homes with limited utility which will be discounted by the market.

So, the investor is left with the choice of selling for less than market value or becoming a landlord. Anyway you slice it, the proposal alters the contract they had going into the transaction and reduces their potential recovery. Actually, one of the commenters on Felix’s blog summed it up nicely:

Seems like a pretty crappy obligation to force a lender/investor to wait for someone to default twice: once on the mortgage, once on their lease.