The Federal National Mortgage Association, more commonly known as Fannie Mae, recently announced a new program designed to keep mortgage-challenged borrowers in their homes. The Deed for Lease (D4L) program allows qualified borrowers to relinquish the deed to their property and rent their home at the market rate for 12 months.
The Property Management Systems team at Software Advice has broken down the program to show you what to expect for borrowers, tenants and property managers.
How Deed for Lease Works
Before a borrower is eligible to rent their home under Deed for Lease program, they must have a deed-in-lieu of foreclosure agreement (DIL) in place with Fannie Mae. This agreement means that the borrower has agreed to give the title to their property back to Fannie Mae in order to satisfy the terms of their mortgage.
Basically, it's an agreement that says, "Take my house and we'll call it even on the mortgage."
Penalties may apply – a ding on the borrower's credit report for one – but those penalties will be less harmful than a normal foreclosure.
Once a borrower is deemed eligible for a DIL agreement, that gives the Fannie Mae the green light and they will contact a property manager to initiate the D4L process with the borrower.
If a borrower agrees to renting his home, the property manager will:
- Review the leasing conditions;
- Determine if the borrower qualifies under the terms of the D4L program (see below);
- Inspect the property; and,
- Approve the lease.
The property manager will also be the one who sets the rental rate for the next 12 months.
Essentially, Fannie Mae will outsource the administration of the new leases to a third-party property management company.
If the borrower does not qualify for D4L, the property manager will inform the borrower and the normal DIL process continues. The borrower will lose their home and not be able to remain there as a renter.
Who is eligible?
In order to be considered for the Deed for Lease program, a borrower must meet these requirements:
- Have a Fannie Mae mortgage that is in a deed-in-lieu of foreclosure agreement;
- Requested a loan modification and been turned down;
- Show proof of income that the rental rate will not exceed 31 percent of the borrower's monthly income (e.g., If the rental rate is determined to be $1,500 a month, the borrower must show proof of a monthly gross income of at least $4,838);
- The borrower can't be involved in bankruptcy proceedings; and,
- At least three payments have been made on the property from the time the loan started or since the last modification. The borrower also cannot be more than 12 months past due on their payments.
As you can probably imagine, thousands of borrowers around the country are potentially eligible for the Deed for Lease program.
What about the property?
In addition to the requirements for the borrower, the property itself must also meet certain requirements:
- Be in good condition;
- The property in question must be a primary residence (not a second home or a vacation home);
- In compliance with local rules and laws; and,
- Not targeted for any corporate, government or community plan that will need the property for non-residential us.
The property manager hired by Fannie Mae will determine if the property meets these requirements.
What about properties that are already being rented out by their owners? Fannie Mae will work with the borrower to determine if the tenants are interested in renting through the Deed for Lease program. If they are, the property manager assigned to the property will work with the tenants to execute a lease. The property owner will give up his or her property and the property manager assigned by Fannie Mae will become the tenants' landlord.
If either the tenants don't want to work within the Deed for Lease program or a tenant does not qualify for the program, the property will not be eligible for the D4L program. Basically, the tenants, not the owner, must agree to the program for it to move forward.
Own to rent: Do the numbers make sense?
|City||Median home price||Mortgage||Rent (2 BR)||Savings|
How much immediate relief can someone who enters the D4L program expect to get by renting?
Since housing prices vary greatly from one region to the next, it would be difficult to pin down a single set of numbers that describes the potential savings of moving from renting to owning across the country. We've gathered data on the top ten metropolitan areas in the United States by population to cut the widest swath.
Here's our methodology for calculating how much a borrower could potentially save each month by agreeing to the D4L program:
- The length of the loan is 30 years;
- The APR is a 6.18%, the December 2006 average from Fannie Mae;
- The median home price for the metro areas is based on the National Association of Realtors' 2006 single family home report;
- The monthly mortgage amount was calculated using HSH.com; and,
- The average rental rate comes from Zilpy.com.
As you can see, every household would hypothetically save money each month by trading in the deed to their property and renting it out.
Yes, they still have to give up their property to Fannie Mae and lose the equity in their home. But they wouldn't have to move during an undoubtedly rough transitional period and would avoid hefty security deposits if they were to move to a new rental unit. It's a desirable solution relative to immediately foreclosing on a home and having to search for a new place to live.
Your turn: How will this affect borrowers, tenants and property managers?
This is where you come in.
Do you think that the Deed for Lease program makes sense for Fannie Mae, the borrower or property managers administering the new leases?
What problems do you foresee?
For more information about property management software, visit our specialized guide here.