Deed For Lease

There are so many foreclosure rescue plans going on, you may be losing track. So here is the latest... if you don't qualify for any of the current homeowner rescue plans, which allow you to modify your interest rate down to 2% or refinance even if you owe 125% of the value of your home, you now may qualify for Fannie Mae’s new “Deed for Lease” Program, designed to help troubled borrowers stay in their homes and prevent a glut of foreclosed properties from hitting the housing market.

The Deed for Lease program allows borrowers in foreclosure who don't qualify for a loan modification or other workout to transfer the title to their house to Fannie Mae by completing a deed in lieu of foreclosure, in exchange for a lease. Borrowers-turned-tenants will be able to sign a one year lease at current market rent rates. After the initial lease term expires, borrowers-turned-tenants may be entitled to lease extensions on a month to month basis. The goal is to allow homeowners to remain in their homes, for Fannie Mae to avoid the expensive and lengthy process of foreclosing on the homes, and to avoid an overload of foreclosed houses in Fannie Mae’s inventory.

The Deed for Lease 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,” Jay Ryan, a Fannie Mae vice president, said in a statement. The Program also does less harm to the borrower’s credit record than a foreclosure. “It shows that you put your best effort to work out a solution,” said Gabe Del Rio, director of homeownership at Community HousingWorks of San Diego. The Deed for Lease Program will be particularly attractive to homeowners who owe more on their house than it is worth. By paying the market rate of rent in their area, they will most likely be paying less than they were paying on their mortgage.

To qualify for the Deed for Lease Program, homeowners must live in the home as their primary residence and prove that they can afford the market rate of rent, which will be established by the management company running the program. The rent can't be more than 31 percent of their pretax income and the borrower must be released from any subordinate liens on the property. The borrower's mortgage servicer must show that a borrower isn't eligible for a loan modification before the homeowner could apply for the program. Borrowers who haven't missed any mortgage payments aren't eligible for the program (Now remember, as with many of these government programs - if you are trying to do the right thing and pay then you will not be helped. Formerly "on time payers" must first begin to "strategically" miss payments in order to qualify for the Program.)

Fannie Mae executives say the Deed for Lease program will allow Fannie Mae to hold inventory off of already saturated housing markets (preventing the real estate market from tanking further) and makes a bet that the housing market will be stronger one year from now. Fannie Mae’s new policy could make sense, even if prices don’t rebound quickly. “There are a whole lot of costs you avoid,” said Thomas Lawler, a former Fannie Mae economist. “You don’t necessarily have to believe that home prices a year from now will be higher than today.” The company will get rental income while avoiding costly foreclosure expenses. It will also help to safeguard the homes, which are less likely to be vandalized when occupied.

This Program will be great if it works, but if not then taxpayers could be stuck owning thousands of foreclosure houses that Fannie Mae could have unloaded at the outset. If the real estate market experiences another leg down, as some people have been predicting, then this could cost a fortune.

Fannie Mae’s sibling company, Freddie Mac, launched a policy similar to the Deed for Lease Program in March. However, Freddie Mac's program requires the foreclosure to actually be completed and only allows month-to-month leases. Freddie Mac declined to detail how many borrowers have participated.