What distinguishes homeowners from renters? Hint: It’s not what you think
What separates homeowners from people who don’t own homes? The answer is not as simple as you might think.
If you go back to antiquity, the person who “owned” a house was generally the strongest warrior who was capable to taking it and holding it against all rivals. Over the last 500 years the development of government and stable laws of land ownership made it possible for ordinary people to have claims to real property stronger than the edge of a sword or the barrel of a gun.
One of the first attempts to establish property title was the English Doomsday Book of the 11th century. The King set out to establish who owned what so he could better establish and collect taxes. This was the beginning of the chain of title in the British Isles. Here in California, many locations can trace back chain of title to the original Spanish land grants. Each land owner through history is listed in chronological order, and for most properties, no gaps exist in the chain creating clouds on title. Clearly, holding title is a strong claim to home ownership, but is it the definitive claim?
Is the person holding title the one who owns the property? Not necessarily. In some states, the lender on a property actually holds title until the promissory note is paid in full. In land installment contracts, the seller retains title until the contract is paid in full. Also, people can usurp the rights of titleholders through adverse possession. And obviously, even in states where the borrower holds title, such a claim can be extinguished at an auction if the borrower fails to repay a mortgage. In many circumstances, the person who possesses the property with intention of becoming the unencumbered owner either does not hold title, or they may have a tenuous claim to it.
In a pioneer society, people go out and stake a claim to real estate by using it and occupying it. If a property is not capable of producing food (income) and providing shelter, it has no value, and people do not compete to own it. Canadian and Siberian tundra is a modern pioneer expanse of thinly populated land of little value. Owning is occupying and making use.
With society comes the division of labor, and fewer people live a subsistence life. Ownership becomes more complex and people enter into agreements where they exchange stored wealth (money) for shelter. Ownership is a special right of ongoing use, whereas rental is a contractual right of finite use followed by a reversion to the owner. In societies of inherited multi-generational wealth, real estate is the best vehicle for transferring wealth because it provides a perpetual cashflow. With exception of low-yield savings accounts, no other asset class provides this feature.
One of the key features of true ownership is a lack of encumbrances. The more restrictions a property has on it, the smaller the bundle of rights an owner controls. For instance, if you pioneer a property in Northern Canada, nobody is going to review and approve your cabin’s front elevation or limit your exterior color choices as they will in modern planned communities. We give up many individual freedoms for the harmony of society, and the ever-dwindling bundle of property rights is among them.
One of the most common encumbrances on a property is the mortgage lien, and it’s among the most restrictive. For instance, if you own a property not encumbered with a mortgage lien, you could demolish any structures on the property (within legal and practical constraints) and nobody would care. It’s your property.
Once a property is mortgaged, the “owner” no longer has the right of demolition because a lender has a claim to the real estate and has an interest in preserving its value. In fact, the lender will even require a borrower to carry insurance to prevent loss. If the lender isn’t the owner, how can they require insurance, and why do they care?
Lenders want to protect the value of their collateral, the property they may force the sale of at auction. At a public auction, the lender, standing in first lien position, bids the property up to their outstanding balance in an attempt to regain their loan balance from a cash buyer. If the house is worth less at auction than their loan balance, lenders often buy the property at auction and sell in the resale market where prices are usually 15% higher. In short, through a complicated chain of events, lenders know the collateral may become their house, so lenders make borrowers care for collateral as if the lender owned it even though the lender doesn’t…
Hey, if it walks like a duck and quacks like a duck….
Since lenders behave like owners of a borrower’s real estate, and since lenders have right to force a sale if a borrower defaults, lenders are owners, and owners are money renters.
Money Rentership (Loan Ownership)
Over the years, the slow erosion of property rights has made the distinctions between owning and renting less dramatic, particularly in renter-friendly cities in California. Owners have few rights renters don’t, and with exception of equity participation, owners obtain few benefits to outweigh the burdens of ownership. And during the bust, equity participation wasn’t a plus.
The mortgage encumbrance gets to the core of the unnoticed change in people’s concept of property ownership; people who have little or no equity stake in a property have no ownership despite what legal documents may say. What they have is money rentership and the illusion of home ownership. Emotionally, they still feel like homeowners; they still behave and believe like homeowners, but they’re not homeowners.
They own a loan. They’re loan owners.
At some level, people know this, and we observed high default rates once borrowers fell underwater. Despite the Government’s best efforts, people walked away because once they no longer had equity, they saw money rentership for what it is, and unless the cost was less than a comparable rental — which it rarely was — then people walked.
Money rentership — the antithesis of owning — is the California conception of home ownership.
Do these people own property?
Renters clearly don’t own the properties they occupy. Renters acknowledge their status in the lease agreement, and renters make no claim to ownership of the real estate. Renters obtain beneficial use of the property for the term of the lease, but they have no claim beyond that. Obviously, renters aren’t owners.
Do loan owners own property? They are on title, so if you asked a loan owner, they would certainly answer yes, but what do they really own? At least as long as they continue to make payments, they retain control of their ownership destiny, so emotionally they still feel like homeowners despite having no equity, and if they keep paying — and if their loan is amortizing — eventually they will become homeowners.
What about loan owners with interest-only or negative amortization loans? Do they own? Eventually, all toxic loans have a time of recast when the loan amortizes over some period of time down to zero. So eventually, if they can survive the transition, even those who possess the most toxic mortgage products may eventually own their homes. However, the road they have to travel is an extraordinarily difficult one, and very few will survive the journey.
What about people who sign loan papers and take possession with no money down and never make any payments? Do they own? I know this sounds far-fetched, but we have met homeowners like this in the post, Grifters for God: fraudulently occupying a $1.3M home for five years.
Obviously, they feel as if they own the property. However, I’m not so sure. If they never paid even a single penny toward the debt used to acquire the property, does it matter what the title shows? In my opinion, their claim to home ownership is fraudulent, but after nearly five years, and the courts haven’t been able to extract them.
A guy in Montana forged documents deeding properties over to him so he could be on title. The courts did recognize this as a fraudulent conveyance, and they threw that guy in jail.
So it appears getting on title makes the person on title feel like a homeowner, and it also makes it very difficult to get them out of the property.
So what does it take to be a true homeowner? Clean title with no encumbrances? If so, only about a third of those who claim to be homeowners really are. Someday, I hope to join them.