Fannie Mae created a Deed for Lease program that could allow homeowners, who default on their mortgage, to stay in their homes for a year as renters. This program does not allow the homeowner to reclaim any equity or ownership, they simply have the right to continue living in the home and paying a market rent. While the market rent issue will surely be debatable, there is a broader question- is this a smart move by Fannie Mae?
How does the Deed for Lease Program Affect the Homeowner?
Homeowners win in this situation. Their credit rating does not take the same hit as a pure foreclosure and they get to live in their home for a year, paying essentially what they can afford to pay. Homeowners also avoid the heavy stigma that comes with foreclosure. Besides the credit hit, going through a foreclosure is tremendously uncomfortable. Furthermore, with an adjustment to their monthly payment, they will not have to worry about putting down a large security deposit or moving to a less desirable area because they can no longer afford their current residence.
How does the Deed for Lease Program Affect Fannie Mae?
Fannie Mae should see more of a mixed bag with this program. On the positive side, they should experience less degradation of value than if the home simply sat idle. Vacant foreclosed homes experience a tremendous amount maintenance issues and vandalism. Additionally, Fannie Mae will avoid the foreclosure process, saving them significant dollars in court costs and eviction fees.
Conversely, Fannie Mae will lose the opportunity to quickly monetize their losses. Delaying the inevitable will not lessen the blow. While renters will certainly keep the house in better condition than if the house were to sit vacant, Fannie Mae can be sure that a foreclosed tenant will not be a good tenant. Furthermore, the asset management costs of managing individual houses will be astronomical. Perhaps to be part of the program renters will have to agree to maintain the house to a certain standard, but short of that, it will be a logistical and financial nightmare.
Lastly, what happens when the year is up? Fannie Mae could potentially need to spend similar costs to evict tenants and go through the same vacant home scenario. Does the tenant need to agree that Fannie Mae can market the house for sale while they continue to occupy it?
While this program seems like a great consumer opportunity on the surface, taxpayers should ask important questions about the ramifications. It is they who will need to pay for the asset management of these properties and subsidize the below market rents. While no one wants to see a family evicted from their home, the current process is in place for a reason.
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