Homeowner's Blog

Fannie Will Rent to Owners in Foreclosure

Fannie Mae has announced a new "Deed for Lease" program to allow homeowners facing foreclosure to remain in their homes and rent them for up to a year. Typical rents today are far less than the mortgage payments on the same home. This new program will allow many homeowners who have seen their incomes reduced because of the economy stay in their homes. The Administration has tried several programs to reduce foreclosures through refinancing, but private mortgage lenders have been largely uncooperative.

The Deed for Lease program is an outstanding idea. It allows the government to generate fair market rent revenue from foreclosed properties it would lose money on if sold in today's market. It helps many homeowners who are innocent victims of mortgage fraud or job losses/cutbacks as a result of a mortgage lender-induced recession. Home values continue to drop, and this program, like the home buyers tax credit extension just passed by Congress, will help prevent home values from tanking even more and possibly setting off another economic meltdown.
 
Many of these homeowners will at some point find another job or go back to full work weeks . They can then afford to buy their home back directly from Fannie, which will also save taxpayers the 6% real estate commission Fannie would have to pay if it sold through traditional channels.

Mortgage lenders should consider a similar program. Growing numbers of underwater homeowners who are innocent victims of job losses/cutbacks are simply moving out and mailing the house keys back to the mortgage lenders. Consumers who own financial services firms through their IRAs, 401Ks, pension plans or investment portfolios are being poorly served by financial services firm executives who do not take steps similar to Fannie's to protect their shareholders' assets.  They hurt stockholders and the economy previously by lending the stockholders' money to home buyers without documenting their income or assets, or otherwise ignoring sound underwriting practices. It is time for the mortgage lenders to step up to the plate and help undo the mess they created.

Mortgage Bankruptcy Bill Could Be Revived

We applaud Senate Majority Whip Dick Durbin's decision to consider resurrecting the bankruptcy bill if the financial services industry is not able to complete 500,000 mortgage modifications by November. Foreclosed homes are nonperforming assets whose liquidated values are 8-10% less than their current market values after selling costs. If the homes aren't kept up or are vandalized their values will be even less than current market values. Once the real estate market stabilizes we will be lucky to return to historical 2-4% annual appreciation rates. Subtract carrying costs (taxes and insurance) and the measly net return makes holding foreclosed homes a poor long term investment for financial service firms' stockholders.

It is therefore very much in the interest of the industry and its stockholders to complete those modifications whenever it makes economic sense, and taxpayers are even underwriting the administrative costs of modifying those loans. It makes economic sense any time financial services company can restructure the mortgage for at least the homes current market value and the borrowers new payments will be 31% or less of their current income. The financial services firm would save the selling costs and future holding costs (taxes and insurance). With the likely measly net rate return if they held the asset, it would take  many years of appreciation before they could liquidate the home for more than that.

There are many homeowners who can't afford their current mortgage payments, but could afford to make the payments on a reduced mortgage principle equal to or greater than their home's current market value. Creditors should be voluntarily and aggressively reducing those mortgage balances to such levels because it is in their stockholders' interest, but most are not. Bankruptcy judges are also charged with protecting the interest of creditors. If the bankruptcy bill passes they would have the ability to restructure the mortgage when it is the interest of the lenders, and the responsibility to order a foreclosure when a homeowner is unable to make payments sufficient to provide lenders a reasonable return on the current value of the home.  This is not a cramdown for mortgage lenders, it is a helping hand.

Mandated arbitration between borrowers and servicers prior to foreclosure is also a good idea provided steps are taken to assure arbitrators are totally independent of industry influence. Allowing homeowners to stay in their homes for some time while they pay fair-market rent and creating financial penalties for firms that fail to meet the administration's foreclosure-reduction standards are also good options.

"Making Home Affordable" Program Will Help Homeowners

President Obama announced the "Making Home Affordable" program on Wednesday, March 4, 2009. It will contribute to the housing recovery, but won't be a panacea because of its numerous restrictions. According to an analysis by Zillow, a real estate website, about 25% of homeowners nationwide will be eligible. Any step forward is a good step, so we should welcome it and also understand that more steps will likely be needed.
 
The program has two parts. The Home Affordable Refinance program will enable those who have an existing mortgage owned by Fannie Mae or Freddie Mac to refinance at lower rates. The Home Affordable Modification program provides incentives to lenders to help at-risk homeowners avoid foreclosure by reducing monthly mortgage payments.  Homeowners can go to FinancialStability.gov to find out if they are eligible, and monitor the site to keep up with details as they become available.

Other parts of the housing crisis solution, such as federal bankruptcy reform legislation, are also in process. We are also optimistic that the Administration and Congress will be willing to take additional steps if they are needed.