It’s no secret that the current housing crisis is making the purchase or sale of a home a real challenge. There are several reasons why. First, fewer than one-tenth of the number of purchase loans were granted this year vs. last year. Second, the standards for qualifying for a loan are stiff. Thus, housing prices are adjusting downward and the number of days a home will sit on the market is increasing. One thing is for sure. Home inventories will remain high through the first half of the next decade while mortgage loans will continue to be scarce until the private bond markets — which usually supplies the bulk of mortgages in this country — return to normal and the nation eats away at the glut of homes re-entering the market by a steady stream of millions of foreclosures.
So, homes for sale are going to sit around awhile as their prices continue to fall through 2011. What’s a home seller to do? Or, a home buyer for that matter. One way is a risk-improved version of a old standard of selling homes — leasing with an option to purchase.
The art of home buying, or selling has not changed much in the last 75 years but around the turn of this century lenders introduced sub-prime loans in an attempt to increase homeownership. Bad idea. The concept was noble but lenders didn’t understand their borrowers. The thought that someone struggling with credit could, or would on their own, perform on their loan payments was pretty unrealistic to say the least. The science of consumer credit behavior and it correlation to mortgage risk was seriously flawed.
We began studying this concept in 2004 with the GSE’s and a national lender. The goal was to understand how to build a new product for buyers — beyond the subprime mortgage — that was safer for the seller and ensured the buyer would succeed. Our first project took $35 million and deployed it among borrowers who normally would have ultimately purchased a high-cost, subprime loan. The results showed home buyers were attracted to the program and had well-defined purchase terms with payments similar to conventional loans. The result? Many consumers were able to purchase homes on terms that fit their lifestyle while the “auditioned” to become the property owner.
Many leading economists have stressed the Rent-to-Own model of homebuying including the Wall Street Journal’s Future of Finance Forum and Dean Baker, Co-Director Center for Economic and Policy Research in Washington, D.C. among others.
Lease-to-Own is simply a better way to begin the home owing process because there are less defaults and it’s safer way forward for the seller and the buyer.
