The Lease-Back Bailout

David Leonhardt’s column today is about moral hazard in the world of homeowner bailouts: how can we help people who are genuinely having difficulty making their mortgage payments, without needlessly bailing out any old homeowner who’d simply like to pay less?

One of Leonhardt’s proposed solution is the plan written about by Joe Nocera last weekend, under which banks would take over the ownership of underwater houses, and rent them back to their former owners at market rates. This is a great idea: market rents are much lower than mortgage payments, so it’s a savings to homeowners, who also get to stay in their houses. And it prioritizes affordable housing over homeownership, which is right and good.

There’s nothing new about this plan: Dean Baker and Andrew Samwick came up with something almost identical way back in August 2007. It made sense then, and it makes sense now. I’ve been wondering for a while why it hasn’t got any traction over the past year; maybe now that the likes of Leonhardt and Nocera are on the case, and investment bankers are pushing it rather than mere economists, and both presidential candidates are casting about for bright ideas to help solve the mortgage mess, it’ll have a better chance.

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