One of the lesser known programs in the Fannie Mae arsenal of borrower help programs is the Deed for Lease™ program initially announced in November 2009. The program allows borrowers facing foreclosure and eviction to stay in their homes while providing continuing cash flow on the asset after it is returned to the investor.
The program was designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under the 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 current 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. As part of the program, borrowers must be able to document that the new market rental rate is no more than 31% of their gross income. Leases under the program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. As with Fannie’s program for tenant occupied properties that are foreclosed, the Deed for Lease™ property that is subsequently sold includes an assignment of the lease to the buyer.
This appears to be a true “win-win” situation for all involved, including the servicer and the investor. First and foremost, it keeps the borrower/tenant in the home. The displacement factor has never been properly addressed in those situations where a permanent modification or refinancing (HAMP or HARP) are not involved. HALA, and the new Fannie Mae’s version that goes into effect August 1, at best provides a “cash for keys” provision in certain circumstances. That sometimes leads to the “missing toilets and countertop” syndrome as borrowers leave the property.
Next, unlike the HAMP or HARP, the servicer no longer has to worry about advancing on the mortgage loan. Since the start of HAMP, there has always been an issue of borrowers who initially qualify for the modification and then fall back into default. Since the servicer is required in most cases to advance on the mortgage, a modification and then subsequent default would put the servicer back (technically) in the position of having to advance again. Since the loan has been discharged as part of the deed in lieu, servicers are not required to continue to advance. Therefore, the cash flow of the servicer improves. Now, it is just a matter of the servicer selling the property, which came at the reduced cost as compared to foreclosure. And since it can be marketed as an investment property with a tenant already in place, sales should be easier.
And finally, the investor under this program should be getting some form of current cash flow from the rental income off the property, though probably not as much as the mortgage payment. But then again, the borrower was already in default and the servicer was probably not making any payments on the loan, so the investor was probably getting bubkis anyhow.
On the social side of the issue, it is clear that the significant problem that brought about the entire meltdown of the mortgage (and financial) markets was the concept that not every person that qualified for a mortgage should have been a home-owner. No matter which side of the aisle you sit on, the general consensus has always been that the market drive to put people into homes, especially the sub-prime borrower, was not the best founded concept. By readjusting those people caught, by their own errors or by a frenzied market, into a better situation with a minimal of personal trauma, is a good thing for the market.
So, Fannie Mae’s Deed For Lease™ is a program that, if properly executed by servicers, could bring about a dramatic turn in the continuing problems faced in the market today. Let’s hope they catch on.
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