BarCap Sees 'Limited Use' of Fannie's Deed-for-Lease Program
Although a new foreclosure alternative program announced Thursday by Fannie Mae (FNM) presents a new step in mitigating foreclosure risk among distressed borrowers, it looks to have only a "marginal" effect on prepayments within Fannie residential mortgage-backed securities (RMBS), according to market commentary by Barclays Capital (BarCap). The Deed-for-Lease (D4L) program allows qualified borrowers to voluntarily deed the property back to Fannie and remain in the home on lease for up to 12 months. It targets borrowers that do not qualify for other workout alternatives like the Home Affordable Modification Program (HAMP), which allocates federal incentives to servicers that pursue modifications before foreclosure. In Fannie's D4L program, servicers must offer the borrowers the market rent on the property, within 31% of gross income. BarCap researchers indicated the D4L initiative is likely to "see limited use," as it targets the same debt-to-income (DTI) ratio as a HAMP modification. The D4L program applies only to borrowers that qualify for a deed-in-lieu (DIL) of foreclosure, which BarCap researchers pointed out is at the bottom of Fanie's workout heirarcy. Even more important than the program's limited use is the fact that only DIL transactions -- not D4L transactions -- trigger prepayment within RMBS, where loans are are considered prepayed in full and are removed from securitization. "So the D4L has no direct bearing on buyout or prepayment," researchers said. "To the extent that this initiative helps alleviate homeowner pain and leads to better borrower cooperation with DIL proceedings, it should marginally expedite buyout timelines by increasing the share of DILs at the expense of foreclosure sales." Researchers went on to suggest the D4L program is likely a component of the Administration's Foreclosure Alternative Program, which HousingWire sources indicated would include an incentive program for deeds-in-lieu of foreclosure. Sources close to the Administration's deeds-in-lieu plans told HousingWire Fannie's D4L program is separate from the Treasury Department's foreclosure alternative plan. Other aspects of the D4L program, including some strategy and lease structure details, continue to develop following Fannie's announcement. At the Safeguard Properties National Property Preservation Conference in Washington DC, a Fannie source told HousingWire the GSE has no set exit strategy for the D4L program and plans to handle that on a case-by-case basis. The source says Fannie also hopes to resell back to the occupants at some point. But the GSE will not move to one-year leases from the month-to-month lease structure currently employed in its rental portfolio management. Write to Diana Golobay. Jacob Gaffney contributed to this report.