Uncle Sam Slips Noose Over Neck of Housing

In a major shift, Fannie Mae announced today a new program called Deed-for-Lease.  Instead of foreclosing, or just deeding the home back to the bank and walking away, Fannie Mae will now let you rent the home from them instead.  

Here is the press release:

Fannie Mae (FNM/NYSE) is implementing the Deed for Lease™ Program under which qualifying homeowners facing foreclosure will be able to remain in their homes by signing a lease in connection with the voluntary transfer of the property deed back to the lender.

"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."

The new program is designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under Deed for Lease, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at a market rate.

To participate in the program, borrowers must live in the home as their primary residence and must be released from any subordinate liens on the property. Tenants of borrowers in this circumstance may also be eligible for leases under the program. Borrowers or tenants interested in a lease must be able to document that the new market rental rate is no more than 31% of their gross income. (emphasis added)

Leases under the new program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. A Deed for Lease property that is subsequently sold includes an assignment of the lease to the buyer.

Note the bold text there about 31% rent-to-income ratio.  Most banks set reasonable guidelines to protect their bottomline.  I use a 33% rent to income ratio when leasing my own property.  However, Fannie Mae is not a normal private bank.  It's government owned.  This has other implications. 

The major implication for this announcement is that Uncle Sam is not only now the 800-pound gorilla in the mortgage market but is soon to become a major player in the rental market as well.  When you issue 95% of the loans you will own 95% of the foreclosures.  If you think things are crazy with Uncle Sam tinkering with mortgage financing, wait until Uncle Sam owns a bulk of rental property and starts tinkering with rents or application requirements for rent.  I won't go into a long political rant here but, frankly folks, this is scary stuff.

What happens to you when you don't vote for your landlord?  Who in the government determines what "market rents" are?  What happens when the government decides to rent out the vacant property it already owns?  Be prepared for the next wave of unintended consequences.