In a surprise move, Fannie Mae announced it will begin allowing homeowners facing foreclosure to rent back their homes for up to one year. This program allows homeowners to pay market value for rent, a sum typically lower than the price they are currently paying for their mortgage.
“The Deed for Lease Program provides an additional option for qualifying homeowners who are facing foreclosure and are not eligible for modifications,” said Jay Ryan, Vice President of Fannie Mae. “This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities.”
Many see this as a calculated bet from Fannie Mae, that home prices will be higher another year into the economic recovery. The question that remains is, will it work? Big banks got into this crisis by over leveraging themselves during the subprime mortgage days. This move sees them once again putting all their eggs in one basket and betting on a rise in home values.
Fannie Mae will not have to list the homes as “for sale” so on their books they will show a revenue increase and will not have to write off the loss. This will also make the ever growing shadow inventory even more complicated to dissect. Many economists guess the number of homes that are currently foreclosed on but have not yet been listed on the market at over 7 million. The move by Fannie Mae will significantly increase the shadow inventory, but it will be difficult to know by how much, given that the house will not technically be foreclosed on until the lease runs out.
If the bet pays off, it could be a win/win. The homeowner will have cheap rent for at least one year, while Fannie Mae will take less of a loss when they do finally sell the house. If however the shadow inventory starts making news and home prices decline even further, tax payers will be left with the bill. Again.