Meet Your New Landlord: Uncle Sam (aka Fannie Mae)

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Fannie Mae is a government sponsored private company, with its roots in the Great Depression. Unfortunately, mere government-sponsorship was not enough to keep the company afloat during the recent financial crisis, and the U.S. government had to go all in on its bad bet and seize the company to prevent its imminent demise. While the very concept of a government-sponsored enterprise once seemed like something of a oxymoron, it is now beginning to seem like a quaint relic of the good old days, before the Government started simply seizing every shaky financial institution in sight. Now, instead of seizing homes from delinquent borrowers, Fannie Mae has announced a program where it will agree to take a Deed In Lieu (of foreclosure), and, if certain conditions can be satisified, to permit the former homeowner to remain in their former property as renters instead of owners. Fannie Mae calls it the Deed For Lease program.

On one hand, the goal is laudable, to prevent the disruption of the lives of decent people who have been forced from their homes largely as a result of the financial crisis. To the extent that it prevents another foreclosure and distressed property from hitting the market and turning into a bad “comp” that hurts all of the neighborhood’s values, it is also a good thing.

But do we really want Uncle Sam (in the guise of Fannie Mae) to be in the rental housing business, competing with private landlords? I for one, do not think this is even remotely a good idea. Who will maintain and operate these properties (effectively owned by the taxpayer)? Will they do it as efficiently as a private landlord? I sincerely doubt it. Further, won’t this just exacerbate the already-significant problem of shadow inventory, I discussed in a former blog post? Fannie Mae defenders will likely argue that Fannie Mae is not the government, but really, when it is the taxpayers’ money at risk, isn’t this just splitting hairs?

On the other hand, there is a far better way to achieve most of these goals. Go ahead with the foreclosure, and just sell the property to an investor who agrees to rent it back to the former owners. This is truly a win-win – no shadow inventory problem, no long term government interference with the rental market, and, very likely an efficient way to manage formerly distressed properties using the private market. Sound far-fetched? It is hardly science fiction — first of all, it is already happening organically, i.e., even without requiring the investor’s promise to do a rent-back. As reported by the L.A. Times, “Joseph Lenihan, an investor from Palos Verdes Estates, rents two foreclosed homes to their previous owners. Lenihan bought one of the homes this year for $160,000 and rents it to the former owner for $1,500 a month. The rent is more than Lenihan’s mortgage and less than half the previous mortgage payment on the home, which was bought for $450,000 in 2005.” Second, the same article points out that the Obama administration is currently considering just such a program.

Fannie Mae’s current position is frighteningly close to the nightmare imagined by Ronald Reagan — the bureaucrat who appears and says “we’re from the Government, and we’re here to help.” I think we’d be better off learning the lessons of history and leaving this one to the private sector. There appears nothing in the latest Fannie Mae plan that could not be better accomplished by an incentive program for foreclosure investors to rent back to the former owners.

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  1. If they can’t pay the rent, you evict them. I would always TRY to keep the current occupants in if they were willing to pay something close to market rent. There is no move in/move out damage, and they may even be able to buy the house again in the future! This is much cheaper and faster than foreclosing and it’s much less likely the borrower will trash the house or abandon it without notice, leaving it to be trashed by someone else. One issue with a deed in lieu is the tax consequences. The amount forgiven is considered taxable income to the borrower who is let off the hook, and many borrowers don’t want to have to deal with that. A short sale avoids this. Also, state laws vary so widely as to how foreclsures work that most national policy can’t really take this into account. One of the biggest problems with the foreclosure crisis is this huge variation in state laws and time tables. Texas foreclosure is fast and easy and reasonably inexpensive, and they are suffering much less there- not only the lenders, but also the borrowers who are directly affected and those that live in neighborhoods with lots of foreclosures who are indirectly affected. In Ohio and Fl, foreclosure can take 7-9 months very easily and they are suffering a lot more down there, partyl just because of this. People down there are much less likely to want to go for a DIL (deed in lieu) and start paying rent now because they know if they just stop paying they will be able to save up money for 7-9 months or longer if they stall effectively. By then, they will have enough money saved up to make a downpayment on a another house. Moving is less of a hassle when compared to 9 months of free rent. In Texas, you would only get maybe 2 months of free rent, and moving is a pain, so they’d be much more likely to go for this. HOWEVER, Texas law is weird, and DILs are much less likely there compared to foreclosures for legal reasons that I do not entirely understand. So this approach would not likely work well in Texas either.

  2. Hi Florence,
    Great blog, as for as Uncle Fannie Mae creating the program delinquent home owner becoming tenents. There is some thing fishy, Uncle Sam may hold on to the properties for a few years. Then turn around and sell the properties back to same tenents when market turns around or sell them to investors at a higher rate compare to now. Going back to Bush Sr. era NYC did the same thing in Harlem, NYC. Those brown stone properties were sold in last few years to individuals in access of Millions of Dollars.

    Coming back to Stephen’s comments, a great majority of home owners who can not pay $2,500++ mortgage, but they can afford to pay rent $1,000 to $1,500 a month. Obviously when selecting a tenent you’ll have some requirements that meet your criteria.

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