RSS
Home
Fannie Mae introduces Deed for Lease to help ease foreclosure impact
Print
Email
RSS
Subscribe
In a continuing effort to blunt the impact of foreclosure on families, Fannie Mae has announced a program called “Deed for Lease” (already shortened to “D4L” in industry publications). Deed for Lease allows a homeowner to turn over the deed to property in return for a guaranteed one-year lease (aka rental agreement) priced at local market rates. The new program improves on a less formal initiative Fannie Mae started last January that let foreclosed homeowners to stay in the house on a month-to-month basis.
The policy is aimed at minimizing the disruption caused by foreclosure proceedings, which put the family out on the street when the property is seized by the lender. With Deed for Lease, the family loses ownership, but can stay in the house. Put another way, they can walk away from the loan without walking away from the house, as they must do in a traditional foreclosure.
"The Deed for Lease Program provides an additional option for qualifying homeowners who are facing foreclosure and are not eligible for modifications," said Jay Ryan, Vice President of Fannie Mae. "This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities."
The big advantage of the program comes from the money households save when they swap mortgage and other housing expenses for a rental payment. Here are the figures that the Center for Economic and Policy Research calculated for some California metropolitan areas:
| Metro Area | ||||
| Sacramento | ||||
| San Francisco | $704,350 | $3,828 | $1,658 | $2,170 |
| Los Angeles-Orange County | $608,600 | $3,307 | $1,361 | $1,946 |
| San Diego | $564,250 | $3,066 | $1,418 | $1,648 |
Data is from the CEPR’s report “The Gains from Right to Rent” issued last July.
“This policy takes advantage of the fact that in many former bubble markets, ownership costs are likely to be far higher than the cost of renting an equivalent unit, if the homeowner purchased their home near the peak of the market,” said Dean Baker, Co-Director of the CEPR. “In many cases this gap can be dramatic.” Drops of over 50% in monthly housing costs could certainly have a positive effect on a family’s quality of life.
There are limits to D4L
There are some caveats to Deed for Lease, of course:
- The homeowners cannot be eligible for a mortgage modification
- The new rent payment cannot be more than 31% of the household’s income
In effect, this policy sits behind government-sponsored loan modification programs as another backstop to keep people in “their” homes and off the streets. For the surrounding community, it also attempts to keep properties occupied. Empty homes have brought blight to many neighborhoods experiencing a high percentage of foreclosures, and this new policy does address that problem.
Why bother with the loan modification?
For homeowners, Deed for Lease may sound like a better deal than struggling with loan modifications, and pressure may build on lenders to skip the modification part of the process, even though Deed for Lease mandates that a loan modification must be tried first. We will have to see how that dynamic plays out over the next few months.
Is one year enough time on the new lease?
More than one review of this policy has called the one-year lease agreement too short a timeframe to let the marketplace recover and homes start selling again. Families are only guaranteed that twelve-month period in the house, after which the lease goes month-to-month. If the property is bought out of foreclosure during that time, the rights of the new owner probably allow him or her to evict the tenant if they have other plans for the property.
On the plus side, it is possible that down the road the foreclosed owners could buy their property back at a reduced price (once they reestablish good credit or if they can scare up the cash). That could end up being a nice deal for them if prices remain flat long enough.
Useful Links:
Fannie Mae Deed for Lease Information
Center for Economic and Policy Research
http://www.fanniemae.com/newsreleases/2009/4844.jhtml?p=Media
CEPR Report on Gains from the Right to Rent
