Fannie Mae Deed for Lease Program, FHA: The Creation of Another Bubble

by Chris W. at My Thoughts on Freedom

Fannie Mae, the largest provider of funding for U.S. home loans, has announce its Deed For Lease program to allow for allow homeowners to transfer title to Fannie Mae and sign a one-year lease, with potential month-to-month extensions after that. The program also bails out landlords by allowing for their tenants to participate in the program.

WASHINGTON, DC — Fannie Mae (FNM/NYSE) is implementing the Deed for Lease™ Program under which qualifying homeowners facing foreclosure will be able to remain in their homes by signing a lease in connection with the voluntary transfer of the property deed back to the lender.

“The Deed for Lease Program provides an additional option for qualifying homeowners who are facing foreclosure and are not eligible for modifications,” said Jay Ryan, Vice President of Fannie Mae. “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.”

The new program is designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under Deed for Lease, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at a market rate.

To participate in the program, borrowers must live in the home as their primary residence and must be released from any subordinate liens on the property. Tenants of borrowers in this circumstance may also be eligible for leases under the program. Borrowers or tenants interested in a lease must be able to document that the new market rental rate is no more than 31% of their gross income.

Leases under the new program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. A Deed for Lease property that is subsequently sold includes an assignment of the lease to the buyer.

This come on the heels of the government backed agency’s $18.9B 3rd quarter loss and its request for $15B from the Treasury.

So what does this mean to you and I, the taxpayer? Well, for starters, it means that now we are not only owners of these properties but we are now landlords to people who are already having trouble paying their bills and are responsible to collect rents and maintain the properties for an undisclosed period of time.

This also forestalls the process of getting these properties back on the market for at least a year and maybe more while their values further decrease. Not only that, but if the house does sell while it is in the program the lease is transferred to the buyer. Who, other than a speculator, is going to buy a house that is already tenant occupied by someone with a government backed lease?

Proponents of the program say it will save money because Fannie will get rental income while avoiding costly foreclosure expenses. To me, this smells of subsidizes housing and is just another step by the progressives in DC like Barney Frank to perpetuate the Nanny State.

What liberty do we have left if the government controls where we live, where we work and how we get healthcare? Is this really what our Founding Fathers had in mind when they fought for freedom against British tyranny?

I think not.

Editor’s note: The New York Times today has a story on the other government agency that is creating another bubble in our economy and adding insult to injury with the real estate debacle. The FHA. Excerpts from the NYT :

In January, Mike Rowland was so broke that he had to raid his retirement
savings to move here from Boston….

A week ago, he and a couple of buddies bought a two-unit apartment building
for nearly a million dollars. They had only a little cash to bring to the table
but, with the federal government insuring the transaction, a large down payment
was not necessary.

In its efforts to prop up a shattered housing market, the government is
greatly extending its traditional support of real estate, including guaranteeing
the mortgages of middle-class and even upper-class buyers against default.

While the F.H.A. is certainly strengthening the high-end market in the Bay
Area by prompting more sales, there are growing concerns that it might become a
destabilizing force.

Our leaders are truly stupid enough to actually create new bubbles on top of the real estate bubble that has popped. Look to them when our economy blows up again as they will be the cause.

Via Memeorandum


TAO said…

Nothing but bubbles, every place you look its bubbles!

Lets see a bank loans someone money to buy a home, a home that was built when home prices were going through the roof and most likely were sold at peak prices, of course no down payment or any form of equity to protect the lender and the home buyers from periods when home prices drop….

So, homeowners lose their jobs and they lose their homes…

Foreclose, kick the homeowner out of their home, and lets move on!

Then you have vacant homes sitting on the market for…how long? Forever?

Banks end up with real estate on their books that they cannot sell and cannot allow to be realistically priced.

Less credit availabilty, more banks fail in which the government has to make the depositers whole, more unemployment as companies cannot get credit, and on and on it goes…

Then state and local governments have to cut employees and services to adapt to their lower tax base and schools have to cut back educating students to adjust for the new reality…

The new reality is less employment and lower wages…which in turn leads to lower sales and profitability.

Its kind of like losing money on a stock, if you lose 30% it takes alot more in gains to get back that loss…

Just today I have talked to one retailer who informed me that he needed me to cut my prices 10% for him to buy….but then again he goes and informs me that he cannot get stock from his other suppliers….I told him he could wait till his other suppliers got stock in again…

Then I talked to three retailers who are having their out of state landlords double their rent…so they are out of business after the first of the year….they are raising rents because of the increase in vacanies they have in other locations! If these retailers agree to relocate then I will stock them up and give them very favorable terms and throw in a grand opening party and do advertising…

Then I have two retailers who are REALLY struggling and I agreed to send them a variety of goods on consignment till the end of the year and I am going to run ads in their local areas to drum up business…

If I salvage them, or at least half then I will recoup my money in a very short time…

Its called the circle of life…..and of course it goes against the whole concept that a man is an island…

It also goes against everything you believe….

Oh, but my house is paid for and I am secure and pay lots of taxes….so what do I care about the big picture when I am secure?

CJ said…

This is a way for the lender and borrower to delay admitting their mistake. Eventually they’ll have to sell that house. Maybe the government can help them hold onto it, receiving rent that would not be enough to make the property cash flow. So a reasonable investor wouldn’t tie up capital there, except in this case where no one wants to admit their mistake and take their loss. So they take it drip by drip in the form of owning an asset that returns significantly less than the historical average of a diversified portfolio.

While the government plays this shell game so that people can keep living in their $400,000 houses and not admit their mistake, millions of families live in crude houses with corrugated metal roofs and no utilities. People in the US living at the poverty line can’t get their basics under control so they can work out a way to do something truly economically productive. The gov’t is helping affluent people stay in big houses. What a crock!

The only part I don’t agree with is the part at the end about the bubble. They may be trying to create a bubble, but you can’t have another RE bubble in our lifetime. It’s just like if the government poured money into Internet businesses, it would help the stocks but it would not re-create the bubble of the late 90s. If monetary policy stays loose, eventually another bubble will appear. I predict it will be in another industry and we won’t see another RE bubble in our lifetime.

madmath1 said…

This whole thing epitomized a saying I often quote. "History proves that man learns nothing from history."

Chris W said…

Sadly this is the government's way of taking the focus off the problem. By keeping the bubbles inflated or by creating new bubbles, they can say that everything is fine and we are just chicken littles.

By the time the bubble bursts, they are out of office and off the hook or in the case of people like Barney Frank, they just rewrite history and shift the blame.

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