In a press release this morning, Fannie Mae announced a new program for homeowners who are facing foreclosure and who do not qualify for a loan modification: Deed for Lease. Distressed homeowners would complete a deed in lieu of foreclosure back to the lender anad then rent their home from the lender at market rate. Leases may be up to 12 months followed with a month to month option.
Jay Ryan, Vice President of Fannie Mae says:
“This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities.”
For homeowners to qualify for the Deed for Lease Program:
- The home must be occupied as a primary residence. Investment properties may be eligibile as long as there is a tenant occupying the propert and willing to participate in the Deed for Lease Program.
- This program is not available for second homes or vacation homes.
- Available for 1-4 unit properties where Fannie Mae owns the mortgage (not available for government guaranteed or insured loans: FHA, HUD, VA, USDA).
- Second mortgages/liens on the property are not allowed;
- Borrower/tenant must be able to document that the new lease payment does not exceed 31% of their gross monthly income.
- At least three mortgage payments must have been made since the last origination/loan modification.
- Borrower may not be more than 12 months past due on the mortgage.
- Borrower/tenant may not be actively involved in a bankruptcy.
- Rental insurance may be required if there are pets. (You probably want rental insurance regardless).
- Borrower/tenant will need to pay a lease application fee of $75 fee per unit.
I’m wondering if this will be considered a taxable sale — will there be excise tax due? A title insurance policy will be required to prove the title is “marketable”. The properties will be inspected to make sure the occupants have kept the home in good condition and to permit the marketing of the property for sale. I would hope that the Deed for Lease tennant would have the first right to re-purchase their home during the 12 month period. According to Fannie Mae’s announcement:
“A Deed for Lease property that is subsequently sold includes an assignment of the lease to the buyer.”
Homeowners will need to work directly with their mortgage servicer (who they make their mortgage payment to) in order to see if they qualify. According to Fannie Mae, mortgage servicers can offer this program immediately–however, you can bet it may take a while for this program to become available. Fannie Mae offers these instructions for homeowners who are considering this program.
I’m wondering if there is excise tax due on the sale of the property to the lender.
The intent of the program, which I applaud, is:
“to minimize family displacement, deterioration of neighborhoods caused by vandalism and theft to vacant homes, and the effect these have on families, communities and home price stabilization”.
I’m sure we all have abanoned homes in our neighborhoods and know families who have lost their homes. Hopefully this will help make things a little better for all while our housing industry and our economy is trying to recover.
The inclination is that there will not be excise tax due in a Deed in lieu of foreclosure.
Seems like a reasonable solution for some people and the larger big picture of keeping foreclosure property out of the inventory bucket. Sounds like the agencies still want the property sold though. I guess the idea is to hopefully recoup some lost money if the market is on better ground in the future? Or, are they kicking the can down the road, again? What if the heater goes out? Call Fannie Mae to get a new heat pump installed?
Its pretty interesting, Tim. Calling Chase to say your toilet’s plugged because the roll has changed from being the owner of the property to being a tenant.
I’m also wondering how successful showing properties will be while the former owner is now a tenant. I had a home I had rented and decided to sell towards the end of the lease…everything was disclosed to my tenant that I was intending to do this when they originally signed the lease. Funny thing, once I put the home on the market–they did not cooperate. The tenant had no interest in selling my home–they wanted to stay. Imagine if you’re the tenant in where you and your family have lived.
The inclination is that there will not be excise tax due in a Deed in lieu of foreclosure.
Seems like a reasonable solution for some people and the larger big picture of keeping foreclosure property out of the inventory bucket. Sounds like the agencies still want the property sold though. I guess the idea is to hopefully recoup some lost money if the market is on better ground in the future? Or, are they kicking the can down the road, again? What if the heater goes out? Call Fannie Mae to get a new heat pump installed?
Its pretty interesting, Tim. Calling Chase to say your toilet’s plugged because the roll has changed from being the owner of the property to being a tenant.
I’m also wondering how successful showing properties will be while the former owner is now a tenant. I had a home I had rented and decided to sell towards the end of the lease…everything was disclosed to my tenant that I was intending to do this when they originally signed the lease. Funny thing, once I put the home on the market–they did not cooperate. The tenant had no interest in selling my home–they wanted to stay. Imagine if you’re the tenant in where you and your family have lived.
Clearly a glass half full measure…but looking at the empty half will only be for those not intending to actually utilize this option.
It is not a good thing for agents for sure, so be prepared to see this one beat on and beat down by many industry professionals.
“Deed in Lieu” is almost never mentioned as a foreclosure avoidance option, as agents make money on short sales and do not make money on Deed in Lieu or actual foreclosure sales.
It should be a requirement that any agent soliciting short sale business, provide a good written explanation of ALL of the owner’s options including this one and all that = no money for the agent at the door that is soliciting the distressed homeowner.
Short Sale is not the only way to avoid foreclosure, and too many agents approach distressed owners with the idea that it is.
“It should be a requirement that any agent soliciting short sale business, provide a good written explanation of ALL of the owner’s options including this one and all that = no money for the agent at the door that is soliciting the distressed homeowner.”
I’m surprised this doesn’t happen automatically. It could be a generic standardized form that the home owner must acknowledge.
Rhonda,
It doesn’t happen automatically because it would have to go through a similar process as the Agency Law Pamphlet, to become a requirement for agents. By the time that process is complete, the market phase may pass, and so it is deemed an unwarranted use of resources at government levels State to State. Often options vary from State to State, so it can’t be a Federally regulated disclosure like lead based paint. By they time local governments notice and decide to work on some problems…the problems are gone.
A highly ethical broker could hire an attorney to compile that list of optons, and require their agents to hand it out. But attorneys want the broker to say “consult an attorney”, and so when most don’t, the consumer is not adequately supplied with the correct info.
The distressed owner does get a list of options from their foreclosing lender along with tons of other scary papers, but then an agent knocks on the door and convinces them that short sale is the best and maybe only option.
Clearly a glass half full measure…but looking at the empty half will only be for those not intending to actually utilize this option.
It is not a good thing for agents for sure, so be prepared to see this one beat on and beat down by many industry professionals.
“Deed in Lieu” is almost never mentioned as a foreclosure avoidance option, as agents make money on short sales and do not make money on Deed in Lieu or actual foreclosure sales.
It should be a requirement that any agent soliciting short sale business, provide a good written explanation of ALL of the owner’s options including this one and all that = no money for the agent at the door that is soliciting the distressed homeowner.
Short Sale is not the only way to avoid foreclosure, and too many agents approach distressed owners with the idea that it is.
Ok… maybe I am missing something here, but I would bet that this is another pee in the wind program. I get the goal of avoiding family displacement and having an vacant house. However, how is that going to happen if the rent cannot exceed 31% of the tenants income? Most foreclosures are caused by loss of income typically from divorce, medical, or unemployment. So what rent is acceptable when a person can’t show squat for income? My guess is that if a mortgage modification was already denied it is because the person has ZERO income or very little income to begin with. So not only can they not pay the mortgage modification, they probably can’t pay “market rent” either. So now instead of a foreclosure, we are going to have to evict a renter at some point too.
I don’t do loan mods…so I’m not really up on Fannie Mae’s Home Affordable Modification program…I just did a quick glance and this also has the same 31% gross income limit for the proposed modified mortgage payment. If the borrower cannot show income, they don’t qualify for the Deed for Lease program either. (D4L is how Fannie is abbrv. this).
I’m guessing that the market area rent is going to be lower than the modified mortgage payment.
This program is also acceptable following a loan mod.
Perhaps its buying more time for the banks.
If I have spare time or if someone is up on Fannie’s HAM (couldn’t help myself–we have SO many darn abbv’s these days)…it would be interesting to see the differences in programs and how someone might qualify for the lease program when they didn’t for the mod.
Excise is exempt for Deeds in Lieu. The WAC code used on the supplemental affidavit is 458-61A-208(3). The property management aspect of this program is facinating.
The best way to do it would be for the “foreclosing” lender to be the equitable owner, but for the remaining in the home borrower to continue as the owner for maintenance issues. Perhaps the Deed in Lieu is signed to a future date which is the end of the “lease” period, and the mortgage payment is reduced to the fair market rent amount.
There are many ways to do this well, but there will also be many ways for it to fail if not done well or if the homeowner sees it as an opportunity to abuse the privelege vs. appreciate it.
I think the larger indicator is positive…Fannie would not be taking control of properties this way if they did not see an incline in property values in the near future, Investment strategy 101.
My big issue is that when private investors try doing this banks and governments rise up to stop them, ie due on sale clauses and distressed home owner bills. In concept this is a great plan but could be done much better through the private sector by more easily allowing “subject-to
I think the larger indicator is positive…Fannie would not be taking control of properties this way if they did not see an incline in property values in the near future, Investment strategy 101.
My big issue is that when private investors try doing this banks and governments rise up to stop them, ie due on sale clauses and distressed home owner bills. In concept this is a great plan but could be done much better through the private sector by more easily allowing “subject-to
“I’m guessing that the market area rent is going to be lower than the modified mortgage payment.”
For someone who bought zero down with stacked costs at peak, then tried to get a loan mod where they did a forebearance wrapped into the back end, the market rent would be significantly less than the newly modified loan payment. Possibly even half.
Most people that need the help got 100% financing typically with a first and second mortgage. You would not qualify for the lease for deed program with those terms.
So how many people are really going to qualify?
Is there are certain sector of people this targets?
Why does big money only feel like helping people when they get to make all the profit? Seems wrong…
If I am their lessee, I send a letter needing the rotten porch replaced, they don’t react, I fall, can I sue their Fannie….
Scott, I’m actually dealing with people who did 20% down and have lost their equity. They still have their income and qualify for the HARP refi.
You bring up a point–another reason why someone might be pushed over to the Fannie’s leas program over the loan mod would be the loan to value–if the home is upside down more than 125%.
Most people that need the help got 100% financing typically with a first and second mortgage. You would not qualify for the lease for deed program with those terms.
So how many people are really going to qualify?
Is there are certain sector of people this targets?
Why does big money only feel like helping people when they get to make all the profit? Seems wrong…
If I am their lessee, I send a letter needing the rotten porch replaced, they don’t react, I fall, can I sue their Fannie….
Scott, I’m actually dealing with people who did 20% down and have lost their equity. They still have their income and qualify for the HARP refi.
You bring up a point–another reason why someone might be pushed over to the Fannie’s leas program over the loan mod would be the loan to value–if the home is upside down more than 125%.
I also think that this will appeal more to families not wanting to move yet than single individuals. I cannot imagine deeding your home back to the bank and living there while it’s trying to be sold…the only reason why I would do something like that would be for my kids while trying to find another home in the same school district.
I wonder what the terms are with the lease–can the tenant terminate the lease without financial recourse (if they find another place to live)?
I also think that this will appeal more to families not wanting to move yet than single individuals. I cannot imagine deeding your home back to the bank and living there while it’s trying to be sold…the only reason why I would do something like that would be for my kids while trying to find another home in the same school district.
I wonder what the terms are with the lease–can the tenant terminate the lease without financial recourse (if they find another place to live)?
“to minimize family displacement, deterioration of neighborhoods caused by vandalism and theft to vacant homes, and the effect these have on families, communities and home price stabilization
“to minimize family displacement, deterioration of neighborhoods caused by vandalism and theft to vacant homes, and the effect these have on families, communities and home price stabilization
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Matt:
I suspect you are right.
However, if Fannie becomes the owner, and the former owner becomes the tenant, doesn’t the write down hit the books? What creative accounting prevents it from hitting the books?
It will probably only save a few families from having to move, and there will be great press fanfare about it.
I’m still of the opinion that it beats doing nothing. Even in the best of times, with the best governance, actions are taken that have little economic effect, but create the impression of hopefulness.
Hopefulness beats despair, every day of the week.
I was a bit surprised by the requirement
“Cannot be more than 12 months past due on the mortgage”.
Holy cow, have the standards fallen that low?
that line surprised me too… is this how long the mortgage servicers/banks are holding on to some of the distressed properties? wow.
I was a bit surprised by the requirement
“Cannot be more than 12 months past due on the mortgage”.
Holy cow, have the standards fallen that low?
Can someone point me to a link with information about registering my company for consideration as a Deed for Lease PROPERTY MANAGER? I’ve been searching the web for a couple hours and haven’t come across it. Thanks!
Sorry, Cheryl, I have no idea.
Rhonda- It’s hard for me to see a downside to this program. Foreclosure is the worst of all worlds. J-
Jerry, here are two potential downsides I see right off the bat:
1) the homeowner no longer owns the home and they are now a renter living in what used to be theres while the government/FNMA has it listed to sell. It’s not really an incentive for the previous owner to cooperate with the selling of their home now that they’re a tenant.
2) who will do the repairs on the home now that Fannie/Gov is the landlord? We’re facing winter…let’s say a pipe freezes–the former owner is not responsible for fixing this…FNMA/Gov–IE TAXPAYERS will be. Perhaps the Gov will create a department within FEMA to handle repairs on all their rentals.
Rhonda- There should be an adjunct program that would allow/help former owners/now renters to get back to where they were before foreclosure by demonstrating responsibilty for the property in question. The experience might well be motivating- nicht wahr? J-
Jerry are many “shoulds”… I’ve been thinking of a program along these lines but instead of the home being immediately deeded back to the bank, it’s put on hold for about 12 months where the “home owner” has a chance to get it back… I did not picture Fannie putting these homes immediately on the market but it is there right to do so.
Rhonda- I like the “on hold” idea. When are we ever going to get back to a kinder, gentler world? J-
To a couple of people questioning who will be responsible for repairs, I would answer this way: Fanie will turn the property over to a property manager, and it would be operated as any other rental property, with the manager telling the owner, AKA Fannie, that the repair is needed and get the money to do so. That is what I would expect.
I am considering this program, as I am upside down in my mortgage, through no fault of my own. I am looking to relocate very soon and will not be able to sell my home for enought to cover the mortgage. I have never missed a payment, or even been late, but I cannot afford two homes at one time. I believe that my questions have been answered above, btu I will ask anyway. What is the likely hit to my credit, and am I responsible for any taxes on the perceived income to the IRS or any penalties for doing this? Thanks.
I forgot to mention, I was well below the 80% loan to value mark before this real estate fiasco. Now I am probably a good deal above 100% loan to value.
Danny, I believe your credit will be treated the same as a “deed in lieu of foreclosure” which is what would be required for you to participate in this program.
Have you tried the loan mod program?
How is this specific senario good? What can I do about it? I have wanted a home in this neighborhood since before the peak, 8 years. We have a small baby now and want her in these schools.
Taxpayer has been paying for Fannie Mae to lease, 12 months, to the old home owner for the last 6 months on deed for lease program.
Market rate is 1300-1400 in this Arizona gated lake neighborhood.
The old owners/now tenants are locked into lease at $333.00 a month till November 30,2011.
They are driving a lexus, have pets not on the lease, messing up the yard, and are not paying for any repairs. They have no deposit and may be able to get a moving check for $3000 at the end of their year stay as it states in the property management/fannie mae contract that was just faxed to me prior to inspection.
FNMAE lost more money on the sale because no one else wanted to deal with this.
I am going to pay HOA, repairs, and $1000+ mortgage and not even be able to move my family into my new home until December. I will pay over $5000 for them to live +repairs when they move out.
I wouldn’t mind helping someone out, but this seems ridiculous.
Why would I have to pay for someone else to live. I’m not sure why we all have to front the bill. If they were approved by this programs guidelines They can afford to rent somewhere, or rent an apartment if they had to. I cannot see how this makes it better for anyone.