Homeowners Facing Foreclosure Can Rent

REAL ESTATE NOVEMBER 6, 2009 Fannie to Rent to Owners in Foreclosure

Fannie Mae will allow homeowners facing foreclosure to stay in their homes and rent them for as long as a year, as part of the government's latest effort to help troubled borrowers, while keeping more foreclosed properties from hitting the housing market.

The "Deed for Lease" Program lets borrowers who don't qualify for loan modifications transfer their property to Fannie Mae in exchange for a lease. Borrowers-turned-tenants will pay market rents, which in most cases are lower than the cost of mortgage payments, and might be offered extensions when their leases expire.

Fannie Mae wouldn't say in its Thursday announcement how many homeowners it expects would take advantage of the program. The company acquired 57,000 properties through foreclosure during the first half of the year.

Borrowers have to demonstrate they can't afford their current mortgage, but can pay the rent. The borrower's mortgage servicer has to show the borrower didn't qualify for a loan modification.

"If you keep more people in their homes, it's better for the community. It's better for the financial institutions that own those homes," said Jay Ryan, vice president of equity investments at Fannie Mae. "Hopefully, less foreclosure product on the market will help stabilize those communities."

The initiative also would allow Fannie to keep inventory off already-saturated housing markets, and amounts to a bet the housing market would be stronger one year from now.

"I'm sure Fannie is hoping that when they sell the properties, the values will be higher," said David Berson, chief economist for PMI Group Inc., a mortgage insurer. "A year from now, we should be a year further into the economic recovery, and housing demand will be stronger....That will allow you to release homes that have been foreclosed upon but not put on the market."

The program could also help Fannie preserve the value of its nonperforming assets, because occupied homes are likely to hold up better than vacant homes, and rents would provide some income before the properties are sold. "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," said Thomas Lawler, an independent housing economist based in Leesburg, Va.

Housing advocates and some investors have long called for less disruptive alternatives to foreclosure. The program would provide a "big step" towards giving families housing security, said Dean Baker, co-director of the Center for Economic Policy and Research. The rental programs join a series of other initiatives designed to help borrowers who might not qualify for a loan modification.

Fannie will use a professional management company to handle maintenance, and properties that are sold during the lease period will include an assignment of the lease to the new owner.

The move by Fannie follows a similar effort by Freddie Mac that began offering month-to-month leases to owner-occupants who had lost their homes to foreclosure. The Fannie Mae program differs in one important respect: Fannie's foreclosed homes won't be listed for sale. In February, both companies began allowing tenants whose landlords had lost their properties to foreclosure to sign month-to-month leases.

So far, approximately two-thirds of owner-occupants who have been offered monthly leases by Freddie Mac have taken them, and the breakdown of owner-occupants to tenants who have rented under the program is roughly 2-to-1.

Freddie Mac says it is considering whether to extend longer-term leases to some troubled homeowners. "We're looking into our options, because there are certain markets where there's just so much inventory on the market," said Ingrid Beckles, senior vice president of default asset management at Freddie Mac.

In recent months, some industry analysts have been puzzled over why more homes haven't been put up for sale as the rate of borrowers who defaulted climbed higher. Well-intentioned efforts to keep families in their homes have led to delays that some analysts believe are prolonging the mortgage crisis by creating a "shadow" inventory of pent-up supply that will ultimately hit the market.

Separately, Fannie Mae said Thursday it would need an additional $15 billion from the U.S. Treasury after it posted an $18.9 billion net loss for the third quarter, as 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.

Written By: Nick Timiraos, Wall Street Journal
Write to Nick Timiraos at nick.timiraos@wsj.com