Friday, June 03, 2011

Why Have a Bad Landlord When You Can Owe Money to a Worse Bank?

-- Posted by Neil H. Buchanan

In yesterday's post, I noted a somewhat mysterious non-trend in the U.S. housing market. With financial institutions holding millions of empty homes, which they seized from now-evicted households (who learned the hard way that owning a house is a very tenuous form of financial security), and with millions of people being forced to rent, there has been no evident move by profit-seeking companies to buy those houses and rent them to those people.

Even if banks do not want to get into the real estate management business, after all, there are already large companies that own and manage hundreds or even thousands of buildings in states across the country. This suggests that there are people who know how to manage rental arrangements in more than one apartment building. Why, I asked, would we not see at least a few of those profit-seeking companies (or some start-ups) buying up empty houses and turning them into rentals (priced to reflect the differences between managing single-family homes and multi-unit buildings, not all of which would favor the latter)? Why are they "leaving money on the table," in the terms favored by some economists?

Given my pro-renting attitude, it was understandable that one reader responded to my post with a one-line email: "You probably can afford to rent from a good landlord." As I discussed in a post earlier this year (see the last four paragraphs here), I have experienced both good landlords and bad. It is, indeed, the more recent good experiences that give me confidence that rented housing can be well-managed and liveable. The bad experiences convince me that well-managed an liveable housing is not a given. I continue, therefore, to believe that any move away from home ownership toward renting, especially if (as is likely) such a move is dominated by lower-income people, must be accompanied by enhanced protections for renters, compared to the laws that currently exist in the U.S.

There is, however, a bit more to be said about the idea that renting is better than owning only if we can improve the regulation of renting. Any presumption in favor of owning is, after all, based on the notion that people are in a relatively safe and stable (and knowable) position when they own. If we are choosing between having a mortgage and paying rent (even assuming that prices have adjusted to take into account taxes, resale price risk, and so on), the intuitive picture is one in which the owner/mortgage-holder is inherently safer than the non-owner/renter. If I own my home, "they" cannot mess with me.

What we now know, unfortunately, is that homeowners are not nearly as safe as we once thought. Some people have lost their homes to foreclosure, only to learn later that the company that evicted them had no valid legal claim on the home. The biggest problem is the "robo-signing" phenomenon, in which mortgage lenders filed incomplete and defective papers on millions of homes. There have also, however, been reported cases in which the company attempting to foreclose on a home simply had no legal claim at all on that home. Even so, those companies have actually been able to evict people from their homes, using the legal system to seize property that they do not own. Add to this the reports of mortgage servicing companies engaging in delays to put non-delinquent homeowners into delinquency (by, for example, telling them that a loan modification review is under way, and later evicting them because the mortgage is delinquent), and the range of opportunities to mess with people through the mortgage process become clearer.

Consider, however, a small example that seems to cut the other way. Earlier this year, I tried to exercise a clause in my rental contract that allows a renter to modify certain terms of the lease, if he does so within 30 days of occupancy. The office manager told me that there would be no problem. Days went by, then weeks. I asked what was happening, and the manager told me that the home office was generating the paperwork, which would arrive within two weeks. Another month passed. The manager began to ignore my emails. Finally, I talked to the manager's boss, who told me that there was no record of my request. Fortunately, by that time my situation had changed, so that the original lease term actually suited me better than the new terms that I had requested.

Until that point, however, I was obviously frustrated and angry. More than once, I even thought that this was reason enough to consider buying a place, to be able to avoid having to deal with such incompetent fools. I then thought about the alternative, and wondered just how much satisfaction I would get from a mortgage company that was, say, incorrectly charging a late fee. It was a bit like sitting on a stalled subway train, thinking about how much better it would be to be driving along in one's car, only to remember the traffic jams and carnage on the roads.

In short, owning a home is not governed by a clear set of laws on which homeowners can rely, in sharp contrast to the vicissitudes of renting. Both renting and owning involve individuals entering into complicated contractual relationships with relatively powerful counter-parties, where those counter-parties have the power to make individuals' lives miserable in countless ways. Renting puts one at the mercy of their landlord/manager. Owning puts one at the mercy of their mortgage banker/servicer (as well as their property tax assessor, the contractors who do not show up to do work when promised and who do shoddy work, and everyone else who performs the various jobs that a homeowner cannot perform on his own).

Even if I were not able to say that I have recently lived in (reasonably) well-managed rental properties, therefore, it is not necessarily true that the existence of bad landlords makes owning preferable to renting. As always, we need to look at the alternative. Bad landlords can do bad things, and bad mortgage companies can do bad things. The consequences of the latter can be much more devastating than the former (in that they can wipe out a person's life savings, and then some), while the frequency of the former can make renting a stressful and miserable experience.

Naturally, I strongly advocate better consumer protection laws (and enforcement of those laws) for both renters and borrowers. We must not forget, however, that there are victims of abuse in both arenas. As harmful as it can be to have a bad landlord, that does not guarantee that owning would be any better.