Fannie Mae's New Deed for Lease Plan Could Make it Nation's Largest Residential Landlord
WASHINGTON, D.C. (CNNMoney.com) — After posting an $18.9 billion loss in the third quarter, Fannie Mae has come up with an unprecedented program to save foreclosure-facing homeowners from losing their shelter and at the same time generate a more positive perception for itself.
The quasi-government mortgage insuring agency calls its program Deed for Lease. It could make Fannie Mae one of the largest residential landlords in the U.S.
Here is what Deed for Lease involves:
* Homeowners facing foreclosure and who can’t qualify for loan modifications, sign over their house deed to Fannie Mae and start paying market rent – in most cases, lower than the homeowner’s mortgage payments.
* The lease is for one year. Then the property will be sold if the owner is unable to make up the regular mortgage payment shortfall.
* Borrowers have to show they can’t afford their current mortgage, but can pay the rent.
* Borrowers’ mortgage servicer has to also show the borrower didn’t qualify for a loan modification.
* Deed for Lease is similar to Freddie Mac’s current program except that Fannie Mae’s foreclosed homes won’t be listed for sale.
* Deed for Lease will keep more foreclosed properties from hitting the housing market.
* Fannie Mae acquired 57,000 properties through foreclosure in the first half of this year.
“If you keep more people in their homes, it’s better for the community,” says Jay Ryan, vice president of equity investments at Fannie Mae. “Hopefully, less foreclosure product on the market will help stabilize those communities.”
More than a few market watchers maintain Fannie Mae, with its new program, is betting the housing market will be stronger one year from now.
“I’m sure Fannie is hoping that when they sell the properties, the values will be higher,” says David W. Berson, chief economist for mortgage insuror PMI Group Inc. tells The Wall Street Journal.
“A year from now, we should be a year further into the economic recovery, and housing demand will be stronger,” Berson adds. “That will allow you to release homes that have ben foreclosed upon, but not put on the market.”
Occupied homes are likely to hold up better than vacant homes and rents would provide some income before the properties are sold, points out Thomas Lawler, a Leesburg, VA-based independent housing economist.
“If they can keep the property occupied and have at least some positive cash flow, that may end up being less worse than going the route of kicking them out and having a vacant home,” says Lawler.
In Freddie Mac’s program, about two-thirds of owner-occupants who have been offered monthly leases, have taken them. The breakdown of owner-occupants to tenants who have rented under the program is about 2 to 1, according to the WSJ.
Ingrid Beckles, senior vice president of default asset management at Freddie Mac, says the agency is considering extending longer-term leases to some troubled homeowners.
“We’re looking into our options because there are certain markets where there is just so much inventory on the market,” she says.
Both agencies have been under the Congressional microscope for some time because of their troubled financials.
Fannie Mae said Thursday it would need an additional $15 billion from the Treasury after it posted an $18.9 billion net loss for the third quarter. The reason: loans made to prime borrowers deteriorated at a faster clip. That infusion would bring the total cost so far of Fannie’s bailout to $61 billion.
In the past year, the government has invested more than $110 billion in Fannie and Freddie, and it has pledged to invest as much as $200 billion in each company to keep them afloat, according to the WSJ.
The Deed for Lease program “would provide a big step towards giving families housing security,” says Dean Baker, co-director of the Center for Economic Policy and Research based in Washington, DC.
