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.


Michael C. Dorf said...

Because of the vicissitudes of academic life and the housing market, on two occasions I have moved out of a house or apartment that I owned (subject to a mortgage) and then rented it out for some period of time rather than immediately selling it. I have thus been both a renter and a landlord. Interestingly, I found the experiences somewhat similar. I have generally had "good" tenants, by which I mean tenants who: 1) pay their rent more or less on time; 2) only ask for repairs and maintenance that are reasonably understood as the duty of the landlord; and 3) renew or move out when their lease is up. In the one circumstance in which I had a bad tenant, I felt relatively powerless to do much about it, and mostly because taking advantage of legal remedies is such a nuisance. That has been my experience as a renter and an owner with a mortgage as well: Reasonable people seem to behave reasonably, regardless of the law; unreasonable people (including otherwise reasonable people working for unreasonably managed firms) behave unreasonably, regardless of the law. That's not an argument for the irrelevance of the law. Rather, it's an argument for something like the Holmesian "bad man" perspective. The law tends to be most relevant for dealing with jerks, and should be designed with jerks in mind.

Paul Scott said...

I'm not sure it is fair to suggest equivalency between a bad landlord and a bad mortgage holder. The later really can't do anything to you if you are abiding the terms of your loan repayment. A bad landlord can be bad to you even if you are a model tenant.

I certainly agree with you that ownership is not always, or even likely often, going to be the best choice for most people. But I think the reasons for that have been largely covered in your prior posts. This one seems to me to be a stretch.

Circumstance in all things can be different, but I do think it is fair to say that one of the benefits of owning is not having landlord at all (good or bad).

Doug said...

I think there is an indictment as well on the judicial system that executed and enforced these expropriation orders without adequate diligence. A company that never had a mortgage foreclosing successfully on a homeowner? This just should not be allowed to happen.

Doug said...

And the law doesn't tend to work well for jerks (which is why most ordinary people have a searing hatred of law and the legal profession). In a business dispute if you go to court you loose (due to fees even if you win you loose) - companies that cheat on the small stuff (e.g. cable cos that don't honor their own contractual terms - happened to me) there is effectively no remedy for the individual that is worthwhile.

Landlord issues are the same - the penalty for being a jerk tenant is essentially get evicted after a while (big deal) and the penalty for a bad landlord is maybe a fine or work order after an arduous expensive legal process.

Law professors (and I am generalizing here so I apologize in advance) tend to see the world as one of laws but for the average person, it is one of administrative rules of corporations and governments which may or may not reflect the law. On the contrary, people have significant issues and they don't get a day in court (e.g. if their credit rating is incorrectly trashed they need to sort it out).

Even in things like traffic laws the risk of getting caught and then charged depends greatly on things like where you live and the colour of your skin (pretexting and the rest) while the chance of getting convicted depends on how well you can play the system (seeing if the cop shows up, challenging technicalities, deferring, etc.)

As the Bush Jr years showed the law doesn't seem to stop the powerful when they decide to act outside it.

In short, the current system of laws for the vast majority of non-wealthy offers little protection against jerks and unreasonable people (or organizations).

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