For months, copious bloggers and econo-pundants have suggested that underwater homeowners should be allowed rent their homes instead of foreclosing. Fannie Mae is finally listening. Sort of. It announced a new program today that would allow some struggling borrowers to rent their homes. But anyone interested in this program shouldn't get too excited: it's meant to be a temporary solution. I'll explain some details, and then pose some questions I still see as outstanding.
The program is called "Deed-for-Lease" (D4L). Find full details here. If I'm reading the literature correctly, only borrowers with mortgages held or guaranteed by Fannie will be able to participate in the program -- so it isn't open to everyone. But such borrowers can contact their servicer to determine if they qualify.
What's that criteria? Among other requirements, here are a few that stand out:
- You can't be more than 12 months past due on your mortgage payments.
- You can't be in bankruptcy.
- You're the property's primary occupant, and it isn't an investment property.
- The lease can be up to 12 months.
- The rent will be set at "market rate."
- The rent cannot exceed 31% of your monthly gross income.
I've got a bunch of questions/observations after reading what's been released by Fannie:
The biggest question I've got is: how do servicers establish the market rent? Determining the market rent for any property is not trivial. And in a volatile real estate market like this, it's even more difficult to determine. My guess is that servicers will have to rely on a fairly basic formula to calculate these rents -- it will hardly have the time or personnel to bother with a precise sophisticated price-setting mechanism.
Maybe that equation could include number of bedrooms, number of square feet, age of home, zip code and the most recent appraisal. But clearly, homes can have similar attributes within such characteristics and still demand vastly different rents in the market. This will benefit some program participants, but hurt others.
This is may be my favorite part. According to the "Frequently Asked Questions" (.pdf):
The occupant agrees to be responsible for regular maintenance, to keep the property in good condition, and to permit marketing of the property for sale.
In other words, you are your own landlord. Clearly, there's some moral hazard that goes along with this. Especially given that you don't have to put down a security deposit beyond the $75 application fee, as far as I can see. This isn't a rent-to-own scenario -- it's a temporary program meant to end when the Fannie finds someone to buy the property.
The Fate Of The Property
And that's also an odd feature: this program isn't meant to keep these Americans in their home ultimately. It's just meant to make foreclosure easier, or something. They can stay up to 12 months, but during that time:
Fannie Mae reserves the right to market the property while a tenant is occupying the property. The property may be sold to an investor subject to the lease.
And when the lease is up, the former homeowner can be (and probably will be) kicked out. So I'm a little unclear what the borrower really gets out of the deal, other than prolonging finding a permanent rental or new home to purchase.
Who Will Participate?
Since this will only apply to borrowers who have Fannie mortgages, those who qualify will be largely prime borrowers. Low income borrowers who have mortgages guaranteed by the FHA or other federal agencies aren't even eligible.
That makes me wonder who will be able to pass the 31% of gross income threshold test. Most prime borrowers who are going into foreclosure are doing so because of unemployment. If they have no income, they can't participate: 31% of 0 is still 0.
Are Borrowers Really Better Off?
Finally, I worry that servicers will just end up using the program to their advantage. They might use D4L as a way to squeeze some money out of borrowers, only to throw them out once they find a buyer. I can already imagine verbal false promises of servicers to sell borrowers back their homes once they get back on their feet. In the meantime, servicers are getting rent from these borrowers who otherwise would be paying nothing, waiting for foreclosure. Ultimately, however, they'll sell the house to the top bidder, who will most likely not be the original homeowner.
To be sure, this program is intriguing. I'm just wholly unconvinced it will do much to really help borrowers, and it sounds like a logistical nightmare on several levels. As far as I can see, it won't prevent foreclosures at all -- just allow those who foreclose to rent for a while, until they find a new place to live. I guess that might be helpful for some, but ultimately, I just don't see the point.