The director of Fannie Mae
deed for lease (D4L) program outlined the initiative during Thursday’s Texas Mortgage Bankers Association
(TMBA) servicing conference.
Miguel Gutierrez said the goal of Fannie Mae is to minimize family displacement for borrowers that participate in a deed-in-lieu of foreclosure program, launched early in November 2009, while managing it in a way so as to not put any undue pressure on Fannie’s ever-growing rental portfolio.
The homeowner-turned-renter is required to pay fair market rent to stay in their home for up to 12 months. The renter must have enough income to sustain a 31% income-to-rent ratio and rental payments are not subsidized by Fannie Mae, but could include renters eligible for Section 8 payments.
As an example, Gutierrez outlined the situation for a fictional family that purchased a $275,000 home in Phoenix with a $247,500 mortgage and a down payment. Including homeowner association (HOA) fees, their monthly payment was $2,050. While those payments were manageable five years ago, the sample borrower had reduced income from his job and HOA fees had increased. Unable to pay their mortgage, the borrower joined the D4L program, reducing their rent to $1,000 while the family continues to look for additional income and/or alternative housing.
The upside of the program for Fannie Mae, Gutierrez said, is promoting neighborhood stabilization, mitigating real estate owned (REO) costs and provides the opportunity to consider other REO strategies, such as maintaining longer rental terms.
“With these benefits to Fannie Mae and borrower, we find the deed for lease program is an effective solution for these properties,” Gutierrez said.
There are some requirements for the new renters’ eligibility. Property managers inspect the home to ensure it is well maintained, generally an indication the renter will continue to keep the property in good repair during the lease term. The house must be eligible for lease; many times HOA rules don’t allow a home to be rental properties.
The program marks a significant shift in the strategy for the government-sponsored enterprise. Whereas Fannie Mae would previously dispose of properties in a traditional REO sale, now Fannie is becoming a landlord. Gutierrez said that’s a position Fannie is prepared to be in for the near future.
“We’re building a rental portfolio and the strategies are going to differ depending on the market. In some markets we’ll take a long view and want to hold onto the rental properties for some time,” he said. “In other markets, we may decide to reduce in our inventory. But in some cases, it’s possible some of these tenants will be able to stay in these homes for a few years.”
Those attending the presentation had many questions. Gutierrez said the agreement is recorded on the renter’s credit record the same way a traditional deed-in-lieu of foreclosure would be. The lease agreement gives Fannie Mae the ability to market the home for sale, but for now, Fannie policy is not to do so during the initial lease period.
The biggest barrier in the program is varying and limited deed-in-lieu laws in different states. “There’s excitement on the side of borrowers and servicers, but there are deed in lieu issues,” Gutierrez said.
The program could get a boost from the Home Affordable Foreclosure Alternative (HAFA) program, which offers incentives to servicers and second lien holders to consummate deed-in-lieu transactions. Gutierrez said Fannie hopes its program will benefit from increased workouts incentivized by HAFA.
Write to Austin Kilgore
The author held no relevant investments.