Own-to-rent: turning mortgages into leases

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.

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Here’s 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 a borrower facing foreclosure and 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 Fannie Mae the green light, the government-sponsored entity will contact a property manager to initiate the D4L process with the borrower.

If the borrower agrees to rent his home, the property manager will:

Review the leasing conditions

Determine if the borrower qualifies under the terms of the D4L program Inspect the property

Approve the lease

The property manager will also set 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:

Must have a Fannie Mae mortgage that is in a Deed In Lieu of foreclosure agreement

Must have requested a loan modification and have been turned down

Have proof of income that the rental rate will not exceed 31 percent of the borrower’s monthly income (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)

Must not be involved in bankruptcy proceedings

Must have made at least three payments 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 Thousands of borrowers around the country are potentially eligible for this 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 must be a primary residence, not a second home or a vacation home

Be in compliance with local rules and laws

Not targeted for any corporate, government or community plan that will need the property for non-residential use

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 the tenant doesn’t want to work within the Deed for Lease program or 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.

Does the program make sense?
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 U.S. by population to cut the widest swath.

Here’s the 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 percent, the Dec. 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

The average rental rate comes from Zilpy.com

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.

Author: Chris Thorman, softwareadvice.com