Own to Rent: Breaking Down Fannie Mae’s Deed for Lease Program


Market Analyst

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

fannie mae 2

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
New York $469,300 $2,868 $2,200 $668
Los Angeles $584,800 $3,574 $1,749 $1,825
Chicago $273,500 $1,672 $1,440 $232
Dallas $149,500 $914 $908 $6
Philadelphia $230,200 $1,407 $1,095 $312
Houston $149,100 $911 $900 $11
Miami $371,200 $2,269 $1,600 $669
Atlanta $171,800 $1,050 $1,000 $50
D.C. $431,000 $2,634 $2,030 $604
Boston $402,200 $2,458 $1,850 $608

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.

  • Larry

    What will prevent the lenders from cherry picking people to give them the renting agreement. Already Lenders are given: Compensation according to HAMP for DIL and Short sales, loan mods, and DTI dollar to dollar from 38% to 31%…is this just going to be another SNEAKY way to continue to give lenders money? Are they going to become the next “landlords” and get money for that too?

  • doris

    As a Trainer for Fanniemae HFI this will help some in high rent area such as Ca, NY, Fl. The hard part is getting the word out to the masses. The biggest problem I have seem with Fanniemae and Freddiemac is reaching the masses get to ground roots…. in community.

    • Thewayitis123

      Doris: I’ve found a situation where the D4L tenant (foreclosed owner) is paying substantially less than fair market rent for the unit they are renting back from FNMA under a D4L agreement.  Additionally, the new purchaser/owner must pay the D4L tenant relocation fees (anywhere from 7050.00 to 9600) to eviction him! Seems like a sweet deal for the defaulter and pretty costly for the new owner. How fair is this??

  • Austin

    I think the intention was good but my problem there will be to much property in the hands of the government agency. They need to find ways to allow property owners to continue own those property. There may be some fine tunning that may be needed to this agreement.

  • http://www.sellthisplacenow.com Norman Frenk

    Can’t say about the other states, but Texas’s tax rate on R/E is 2%-4% of the value of the home, meaning that with taxes, insurance & Mtg. a $149,900 home mtg payment would probably be $1400/month (P.I.T.I) if buyer put minimum down.

  • http://www.bargainpropetybuyer.com Deborah Schultz

    How can investors bepart of this process. Could investors take over property management responsibilities? Could investors buy the property from Fannie Mae and become permanent owners? If homeowners manage to make good on their lease for a whole year, and have a better financial situation, can they turn their lease into a rent to own?

  • John Mark

    What happens after the 12 month lease is up? The renter who gave his home to Fannie Mae in the deed-in-lieu will not qualify for a new mortgage for at least 3 years because of the DIL.

  • http://www.SoftwareAdvice.com Chris Thorman

    @ John Mark

    Fannie Mae hasn’t made it clear what happens after the 12 months are up. They’ve left open the possibility of renting month to month though.

  • http://www.SoftwareAdvice.com Chris Thorman

    @ Norman

    Thanks for that info. I used Zilpy and HSH for all of the metro areas for consistency.

  • http://www.SoftwareAdvice.com Chris Thorman

    @ doris

    Interesting point. Thanks for the insider info.

  • http://www.esquirepropertymanagement.com Greg Guillen

    It’s an interesting idea and I am glad they are trying to figure something out to ease the situation. However, the qualifications are so complicated and burdensome that people would rather not even try to jump through all of the hoops. When people let their homes go to foreclosure, it really isn’t too difficult to save a large amount of money for a security deposit…since they haven’t been paying their mortgage for 6-12 months they typically have tons of cash on hand and can pay a double deposit and qualify with reserves in the bank. I just don’t think people will want to go through all of the red tape.

  • Jorge

    Will this Deed for Lease Program allow my family to stay in our home indefinetly as long as we make payments?? Will this program save our home??? I am desperate and cannot loose our home, the bank has already told me we have no other way of saving it but fannie mae..what is the garauntee of this working for us? can I have a phone number or email contact to call so that the process can be explained to me . I am really confused

    Thank you
    George Gutierrez

  • http://leaseacar.org.uk Lease a Car

    Good article and a good information well.
    Earl Nunes

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