On November 5, 2009, Fannie Mae launched what they characterize as a Deed-For-Lease in lieu of foreclosure program. The program allows a financially-distressed homeowner who does not qualify for a loan modification to stay in his home as a tenant by exchanging title to his property for a one-year lease agreement. The program does not include a repurchase option.
To qualify, the homeowner must currently occupy the property as his primary residence and deliver title to the property clear of any liens junior to the Fannie Mae loan. Rent under the program is capped at 31% of the homeowner’s pre-tax income, with lease agreements for periods up to 12 months with a renewal or extension on a month-to-month basis. If the home is sold during the term of the lease, the buyer takes title subject to (“inherits”) the lease.
This program aims to alleviate the deterioration of neighborhoods caused by vacant properties and foreclosures, and to soften the financial and social impacts of a homeowner losing his house.
first tuesday take: At last the government, through its mortgage arm Fannie Mae, is getting realistic with negative equity homeowners in California, most of who do not qualify for modification as they are at loan-to-values (LTVs) in excess of 125%. Fannie Mae could not previously admit to the obvious: take a deed-in-lieu of foreclosure, and if it could not instantly be resold as a real estate owned (REO) property, lease back the property to the homeowner who could/would not pay on the loan. However, the government agency must still foreclose on homeowners who have second liens on their homes in order to convey title to the property on resale as an REO.
This is a meritorious step forward for a lender and but a simple variation of the short sale of the property negotiated by the homeowner and his agent. Under the deed-in-lieu program, the lender, not the owner, is required to find the buyer at current market prices. Stranger conduct by lenders has been observed, specifically the refusal to process short sales (since allowing the discount of the loan on a payoff is anathema for poker-faced lenders).
We will see prices bottom sooner under this type of program as properties (which are currently being withheld) are sooner placed on the market. However, the process will still elongate the recovery of the real estate industry from its deep-rooted recession. The reason: after the one-year lease period is up, properties will be dumped onto the market at a time the market would otherwise be going into a recovery or a sales volume upswing.
This sale lease-back situation will provide flexible agents and brokers an opportunity to earn a fee for negotiating the exchange of the title for the lease agreement. This sale-by-exchange for the leaseback will be part of the consideration given the homeowner for title to the deed-in-lieu documentation. Since no foreclosure took place, the homeowner did not suffer the social embarrassment of foreclosure or receive a ding on his credit score. However, lenders are quick to ask a homeowner about entering into a deed-in-lieu arrangement.
MLS inventory is replete with short sale candidate properties which are underwater way more than 25% and thus are ineligible for loan modification (which modifications typically see a re-default within six months, as has been the history of such “extend and pretend” programs). Most of these homes are presently owner-occupied and a large percentage of them are Fannie Mae loans. For the properties which fit under this criteria and have no junior trust deeds on title, listing agents can facilitate the erstwhile homeowner’s negotiation with the lender for the one-year lease. Then, during the year, the same agents can assist the ex-owner/tenant in finding a new property to purchase.
Further, the homeowner may have an investor-buyer who would have done a short sale acquisition of the property and would, concurrently with the deed-in-lieu/leaseback transaction, be willing to acquire the property from Fannie Mae subject to the lease agreement. The rental income schedule under the lease agreement would then be used to capitalize and set the value and price to be paid for the property.
We see fees for brokerage services at every turn in this program – if it ever hits the ground. We hope this one is a breakaway from past save-the-owner programs. Most of those have been dismal failures in the financial restructuring of California hundreds of thousands of underwater homeowners.
The next government-sponsored program needs to grant bankruptcy judges the authority to cram down loan balances to current market values so that homeowners can both stay in their homes and own them into the future. This would force lenders into fast action to make the adjustment in loan balances before the judges get to them. But most importantly for California’s economic growth, the homeowner would be able to stay put without the burden of a dead-end loan, negative personal net worth or the total inability to contribute to the consumer economy during the next ten years (which would be the situation if he irrationally decided to remain in the home and pay, pay, pay). If he stays-and-pays, he will need a flush of a different and more royal sort. [See first tuesday Forms 406, 472 and 550]
Re: “Avoid foreclosure: rent your own home” from CNNMoney.com
Are you nuts!
First of all – what about those potential buyers that in 2005-08 realized that the market prices were acting irrationally and decided to stay out of the market – until it corrected itself? Now you are suggesting that they be penalized by rewarded the people that purchased a home at a price significantly above norms and well outside their reach.
Loan modifications are bad enough…..what is needed is a more robust foreclosure process, getting these home back on the market for average buyers.
The situation that you have today is a high inventory of Short and REO’s with financial sellers only willing to sell to all cash or financial buyers.
Stop trying to create an artificial bottom to the price and let the market discipline and punish those that acted stupidly.
Cheers,
Dan B.
What is this? Definetely more mumble jumble from the gov, the lenders, the banks, from EVERYONE. The comment above is right: the banks/lenders took the tarp money and run. Lenders are NOT willing to negotiate. They give people the run around, then more running around, and then some more running around. In short, they do not care!!! I saw my sister go thru the process for months. It still makes no sense to me. Paperwork was lost several times. She had to re-do those lengthy applications at least twice. Yes, she was in trouble. But come on, the least they could do is to be professional: don’t lose paperwork, return calls, show up for appointments, etc., etc. She is one of the “lucky” ones in that she was able to short sale the house. But the whole thing just smelled fishy and sucked for her and her family. Her house was appraised at $450,000 three years ago or so. It was sold for $225,000. The first lender approved the same and got the second lender on board too. The second lender accepted $3,000 (supposedly as a total payment) instead of negotiating with her and her husband. As long as they don’t go after her for the difference (line the banks/finance companies do when they repo cars), she’ll be “ok”. Her income taxes next year might be a nightmare.
Yes, who do you call for repairs when you are renting your own home? I guess those who do get sucked into doing this better read the fine print. It might just be that there will be NO landlord for repairs, etc. Yet the banks will expect the properties to be in top shape at the end of the lease. Sorry, no dice for me. My dad sold a house we owned our years ago and the new owner wanted me to remain in the property if I paid six months worth of rent in advance. No way, I rather go help someone else pay their mortgage. I was not about to pay rent for a house I used to own. That’s just me though.
I think that it is a very good idea. It allows potential foreclosures to become immediate rentals which stabilizes both the rental and the sales market. It will produce a number of investors ready to buy with built-in tenants and create the possibility of those investors giving options for the previous owners to buy back the homes.
Glenn Egelko
Ventura, CA
Should be interesting when the new tenant wants to call the landlord for repairs. Creative program, however the implementation seems like it could be a nightmare.
Did SB94 effect you? Read this: http://www.prweb.com/releases/2009/10/prweb3108924.htm .
Loan modification made easy.
LoanModDIY.org
Same.O. S. from the Lenders. They took the tarp money an ran.The other problems are there is no financial incentive for the R.E. agents to do all the work involved in helping put together a modification. I sent 68 pages in on my last mod. I cant afford to work pro bono for long and the home owners are living check to check…The stupid banks are loosing lots of money for their investors by not doing modifications at market value to those who can pay the new note. They rather short sale or foreclose and loose much more to save face with their investors by not giving home principle away.Then they can say we had no choice but to loose x $ by dumping on the market. Typical gov and big bank crap of step over a dollar to pick up a dime.
Close, but no cigar. This does NOT solve the breaking down of society through loss of one’s home. What needs to happen is for Fannie Mae (or someone) to buy the homes from the lenders at the short sale price and sell them back to the current homeowners at that price, 30 year fixed, 4-5% interest. This is, in effect what loan modification should have accomplished, but lenders are quite unwilling to negotiate.
Lease back doesn’t help with taxes, doesn’t promote stability, doesn’t anything other than give one more time to worry about one’s future.
I’m 335 days into “negotiations” with my lender. I absolutely did not think ANYONE on this planet could weaken my spirit, bend my spine, or make me sick. My lender has done all three. . . and you WILL be reading the who of that and the story quite soon as they have just refused to deal. My negotiator is going back to them for one more shot, but as the lender has a dreadful track record of helping anyone, has lost paperwork repeatedly, lied in court (I have proof), and probably can’t locate the note, I don’t have much hope.