Can One Bank's Leasing Program Boost the Economy?
Reprinted from the Harvard Business Review website.
Bank of America recently rolled out a "Mortgage-to-Lease" program to help financially struggling homeowners. Instead of foreclosing on delinquent mortgagees, BOA will now allow them to transfer ownership to the bank, have all mortgage debt forgiven, and rent their home for up to three years at the market rate. Mortgage-to-Lease is currently being trialed to 1,000 borrowers in three cities. Leasing — as opposed to foreclosure — can benefit the housing market as well as our economy.
Why? Ultimately, it's mostly about pricing.
A big downside of widespread foreclosures is the housing market becomes flooded with a larger supply. What would happen if a wave of houses were suddenly put up for sale in your neighborhood by sellers who were more interested in unloading their properties than getting the highest prices? Prices would drop, perhaps precipitously. Leasing, however, doesn't increase supply and as a result, prices remain stable or even increase.
The key benefit of higher home prices is the effect on new construction. Enticed by the profit opportunities brought about by higher prices, new construction will ramp up. Since the home building industry is a fundamental driver of our economy, this would be a welcome jump start. As new housing construction employs more people and stimulates demand for related products (appliances, etc.), unemployment recedes — which leads to increased consumer spending.
With more people opening their wallets, other businesses benefit too...and the economic cycle accelerates.
Another benefit of leasing versus foreclosure is a decrease in personal bankruptcies. Fewer bankruptcies result in higher consumer spending and minimize the depressive pall that can shake overall consumer confidence.
One drawback of Mortgage-to-Lease is the moral hazard it creates. After purchasing a home, knowing that banks won't foreclose, buyers have less of an incentive to be financially responsible. This potential moral hazard can be minimized by making Mortgage-to-Lease applicable only to those who hold mortgages today.
Granted, banks aren't in the leasing business. Over time, they're going to want to sell off these houses, too. However, as most of us have had to do because of the financial crisis, perhaps they should be open to change. Mortgage-to-Lease isn't going to make banks and homeowners "whole" again. The upside of this pricing strategy is a boost to the economy- which ultimately benefits everyone including banks (higher prices for the houses they own, better business conditions).
So what do you think? Can a simple pricing strategy - leasing instead of foreclosing - help resuscitate our economy? While Bank of America's program is extremely limited, should the U.S. Government make this pricing strategy normal operating procedure for all banks until our economy is firing on all cylinders?
