November 5, 2009
Fannie Mae As The Largest
Lender Landlord In All The Land?
Having taken back 57,000 properties through foreclosure in the first half of 2009, "bringing its total real-estate owned inventory to 63,000 properties valued at $6 billion," Fannie Mae is rolling out a "Deed for Lease Program" in the hopes of generating some cash from the non-performing assets and mitigating the near-term impact of so-called "shadow inventory" on the market.
The Deed for Lease Program, which Fannie plans to roll out on Thursday, will offer borrowers who fail to complete or don't qualify for a loan modification or other workout to deed their property to the lender in exchange for a lease. Borrowers-turned-tenants will be able to sign leases of up to 12 months and will pay market rents, which in most cases are lower than the cost of mortgage payments.
Borrowers who haven't missed any mortgage payments aren't eligible for the program, and the borrower's mortgage servicer would have to show that a borrower isn't eligible for a loan modification before the homeowner could apply for the Deed for Lease program.
Of course collecting rents from those who have already lost their homes to foreclosure might be a challenge. And while the tipster that first pointed out the story notes, "Good news for RE investors like me, that's fo' shore!", we’d argue it's the opposite.
First Published: November 5, 2009 8:15 AM
Comments from "Plugged In" Readers
hmmm, i'm failing to see why that is good news for a real estate investor also. more artificial propping up of prices with these so called tenants? i'd rather have it vacant and get it for a lower price. let me fix it and find my own tenant...one that's not disgruntled about losing their home and has to be reminded of that by paying rent to a new landlord while living in it...no thanks.
Posted by: anon$random at November 5, 2009 8:29 AM
I'm mixed on this. On one hand, it's not the worst thing to keep REOs occupied, and it's some cash flow to FNMA that the rest of us responsible taxpayers don't have to provide.
On the other hand, these previous owners are probably a little disgruntled and might take it out on the property (sell copper pipe, dishwashers, etc.) and then flee, but there was nothing to keep them from doing that anyway when getting foreclosed. The other issue is that the tenant (and let's be honest, some of these people were always "tenants" renting from the bank, since many had IO loans or put nothing down) needs to be out before someone buys the place -- will they leave quietly after their lease of their previously owned home, or will they need to be evicted? If they need to be evicted, that's extra time where rent isn't being paid and extra cost for legal procedures.
I'm not entirely sure what the effects are on the overall market. All of these people need somewhere to live, so I would think that the net number of houses on the rental market actually goes up because existing landlords are losing possible renters to REOs. These REOs would otherwise be empty and/or for sale, and not part of the rental market.
So will this bring rents down further? If so, that would put further pressure on housing prices (i.e. price-to-rent ratio), which is a good thing. But it also takes houses off the housing market (even if temporarily), so supply is lower. I'm not sure where this nets out.
It's possible that, on the whole, it might be a good thing to prevent a large number of vacants a la Detroit/Baltimore and to get some cash into FNMA, depending on how the housing price effects net out.
Posted by: corntrollio at November 5, 2009 8:46 AM
How does this work with the SF tenant protection laws; could Fannie run into trouble removing the tenants at the end of the lease?
Posted by: gowiththeflow at November 5, 2009 8:51 AM
terrible for wannabe investors. it's hard enough to crack into the market, now this will eliminate a bunch of opportunities to buy foreclosed houses that cash flow.
Posted by: David at November 5, 2009 11:12 AM
I can kinda see this one from both sides.
This could be a great thing for investors and the country overall because perhaps it'll produce a "crowding out" effect and thus persuade investors to put their money into more productive areas of the economy than real estate, getting the investors a greater return and producing domestic jobs to boot. I don't see how subsidizing landlords to take more existing real estate and rent it out helps employment, which for non-elites is a problem right now.
Posted by: Brahma (incensed renter) at November 5, 2009 11:39 AM
This circles back to other comments I've made recently on REOs: it's a waste of time to discuss the real estate "market" today when there really is no true market per se. The government IS the market. Now, they're not only the mortgage market, they're a landlord as well. Not only do they set mortgage rates, they can now set rents, at least indirectly.
Would you sit down at a high-stakes poker game where the dealer could change the rules of every hand, and not bother to tell you until after your bet was laid down? I wouldn't.
On a related note, did anyone else see that the FHA failed to file their audit on time? I guess their volumes of both loans and defaults have spiked so much that it's difficult to predict where they'll be in a year. I wonder how much that bailout will cost us? At least realtors and other chest-beaters can go around screaming about how hot the lower end of the market is.
Posted by: Legacy Dude at November 5, 2009 12:09 PM
It's a homeowner bailout plain and simple. And it is just another step in what is becoming a complex set of delay tactics to slow the inevitable collapse of the bubble. It's really quite amazing to watch this from a macro-economic perspective. The gov't really doesn't have any other option here but to sustain the economy at all costs. It's really impressive to watch. The long terms costs are going to be a very real burden on this country.
Posted by: eddy at November 5, 2009 12:19 PM
This program offers leases "up to" 12 months, which I assume they'll use as an inventory management technique to get some cash off places they needed to foreclose anyways but don't want to flood the market. What they have been doing until now has been to just let you live in your place rent free while the home is in line to be sold. This lets them take more money off the "homeowners", while doing what they are already doing.
A bigger problem is whether this will cause the number of defaults to increase. I think it will.
The reason people keep irrationally making payments on their homes has been because they wanted to stay in them when they would be smarter to walk away.
This program will encourage people to stop doing that, because the only reason -- to keep the home -- has now been removed. Stop making payments AND keep the home. Then, as a renter, it's probably easier to move away for a job or what have you because the home is no longer tying you to the area.
So way more people will default, and way more homes will be resold.
So in the end, they'll be left with even more homes to sell, and they are already taking so long to sell them that this just lets them squeeze more cash out of the process. The delays are already occurring -- this won't delay any more than is happening now. But it should goose the default rate higher, and so the investor is right: it's going to speed up the pace, not slow it down more than the glacial pace at which it is already moving.
Posted by: tipster at November 5, 2009 12:25 PM
>>The long terms costs are going to be a very real burden on this country.
What is really happening is wealth redistribution, which is what 90% of government activity consists of. The country isn't going to be burdened. Rather, some people who think they are rich (due to owning government bonds) will be forced to give up some of that wealth down the road, via a combination of taxes and inflation. The burden will be on specific classes within society, not the country as a whole.
Posted by: Fred at November 5, 2009 12:56 PM
I wonder if these people will lose their "pride of ownership" or the ability to paint their walls when the become tenants in what could potentially become the largest Federal housing project.
Posted by: HappyRenter at November 5, 2009 1:17 PM
Yes. I think the memo reads that all "Pride of Ownership" warm fuzzies are to be seized by the feds. Oh, and if you're repainting be careful. Fannie Mae frowns on anything except eggshell white.
HappyRenter, is it? Huh. Could have fooled me. Cause that was more than a little bitter.
Posted by: anonn at November 5, 2009 1:42 PM
So, a company that blew itself up in mortgage finance is proposing to make a coherent run as a nationwide landlord?
Someone explain to me again why all these braindead insolvent companies haven't yet been wound up in liquidation proceedings?
Posted by: Debtpocalypse at November 5, 2009 1:44 PM
I predict rising copper prices...
Posted by: BobN at November 5, 2009 1:45 PM
"Make me wanna holler.
Throw up both m' hands.
Make me wanna holler.
Throw. Up. Both. My. Hands."
NEW YORK (Reuters) – Fannie Mae, the largest provider of funding for U.S. home loans, on Thursday said it would again tap the Treasury to plug a net worth deficit after bad mortgages and foreclosure prevention efforts resulted in a $18.9 billion net loss in the third quarter.
Shares of Fannie Mae tumbled 7.1 percent after it reported results in extended after-hours trade.
Posted by: Debtpocalypse at November 5, 2009 4:36 PM
Debtpocalypse, this is just the flip side of Congress continuing to extend the home buyers tax credit. Our political leaders are aiming for a "soft landing" in real estate, and if Fannie and Freddie were put into liquidation, there would be the mother of all crashes because they have so much inventory on their books. The home buyer tax credit is aimed at the demand side (artificially sustaining it) and the continued bailouts of the GSEs are aimed at the supply side (not introducing a supply shock).
I don't agree that it's good public policy, but I can understand the perspective of folks like Sen. Johnny Isakson.
Posted by: Brahma (incensed renter) at November 5, 2009 4:59 PM
This will be beneficial to seasoned RE investors who already own RE (as well as current homeowners) because it's another effort to avoid a collapse in housing prices by flooding the market with repo's. There are inherent negatives, but I think this definitely nets positive, and at least is not another burden on tax payers. But to be honest, I don't think it will make much of a difference to us frisco investors, as I doubt there will be much USG landlording in our 'fair' city (plus, does the USG really want to mess with rent control? I didn't think so.)
Posted by: 45yo hipster at November 5, 2009 4:59 PM
What, they couldn't afford the postage due on 57,000 sets of keys being mailed in? This whole thing is wrong in so many ways. I've been sitting here all day trying to think of how to present my feelings on this hopeless, ill-concieved plan. My special thanks to Marvin/Debtpocalypse for expressing perfectly what I have not been able to convey myself.
Posted by: OneEyedMan at November 5, 2009 5:06 PM
"said it would again tap the Treasury to plug a net worth deficit"
My, that sounds handy.
Can I do that?
Posted by: diemos at November 5, 2009 7:24 PM
45yo hipster wrote:
> This will be beneficial to seasoned RE investors who already
> own RE (as well as current homeowners) because it's another
> effort to avoid a collapse in housing prices by flooding the market
> with repo's.
I agree that this will help to prop up home prices in the short term, but the government can’t afford to keep the program going for ever.
> There are inherent negatives, but I think this definitely nets positive,
> and at least is not another burden on tax payers. But to be honest,
> I don't think it will make much of a difference to us frisco investors,
> as I doubt there will be much USG landlording in our 'fair' city (plus,
> does the USG really want to mess with rent control? I didn't think so.)
I want to know who will get the management contract since whoever gets it will make buckets of money. I doubt that this program will have any cash left over to the taxpayers every month (and will probably run at a loss). If it is a government program it will probably “require” union labor and that means that every time the new “tenants” call with a problem we (taxpayers) will pay out more than $1,000 to the union firm that comes out (in their fancy truck) to fix something.
P.S. This is the first time I’ve seen “us”(as in those of us that live in the city) in the same sentence as “frisco”…
Posted by: FormerAptBroker at November 5, 2009 8:33 PM
Ya'all too negative on the USG. I think they can farm out the prop mgmt (hey! It'll create jobs!). And I think they can skip unions too. USG has gotten better at some things- look at all those forms, etc they have online now :)
the whole idea here is to not have to dump alot of housing stock at once, and this will certainly help avoid (not delay) more housing declines. I dunno, with prop 13 at my back and all this nifty USG intervention, I'm kinda liking mrs. Bene, Timmy, Larry-o. I'm down with the program.
Posted by: 45yo hipster at November 5, 2009 10:35 PM
Good for your equity hipster but a flood of rentals onto the market might not be so good for your cashflow.
Posted by: diemos at November 6, 2009 12:03 AM
Diemos- I think a natural balance between rentals/owners will remain. If all those folks didn't foreclose, they would stay in their homes. Same will happen now. If foreclosure occurrs, houses are dumped on market, and either renters or investors buy them (presumably) on the cheap. Were just shifting sand really.
And at any rate, I don't think this Pgrm will impact frisco's (sic) market much one way or the other. BTW, anyone else care to join my crusade to rejuvenate the frisco name? (I admit to dropping the name in the most local of places just to see folks reactions:)
Posted by: 45yo hipster at November 6, 2009 7:19 AM
if both Otis Redding and the Hell's Angels use "Frisco" then who are we to judge?
Posted by: Rubicon at November 6, 2009 1:23 PM
Plenty of old school San Franciscans say Frisco, and it's interesting to see the younger folks who say it. It really varies along ethnic/racial lines. I'm told its attempted eradication was the pet project of one Herb Caen.
Posted by: anonn at November 6, 2009 1:28 PM