Fannie Mae to Allow Borrowers to Lease Their Homes

Fannie Mae announced a plan on Thursday that will allow borrowers facing foreclosure to lease their homes. The program, called Deed for Lease or D4L for short, allows borrowers facing foreclosure to hand their deed to the lender in exchange for paying the market rate rent on the home for at least 12 months.

To qualify for the program, borrowers have to have mortgages insured by Fannie Mae, be unable to qualify for President Obama’s mortgage modification program, and be unsuccessful renegotiating with their lenders. While eligible borrowers would have to voluntarily give up the deeds to their homes, they would be able to stay for at least a year, providing that they paid the market rate rent. Rents would then be renewable on a month-to-month basis. Eligible borrowers must document that the new market rate rent is no greater than 31% of their gross income to qualify for Deed for Lease.

The Deed for Lease program is an extremely interesting and valuable way to keep delinquent borrowers in their homes, or merely to allow time for a transition. The program may be especially valuable for families with children, whom they do not want to remove from their schools in the middle of the year. It will help give families more time to come up with options. It will also help underwater homeowners– especially in areas that have seen property values drop significantly.

Furthermore, since tenants of qualifying borrowers are also eligible for the program, Deed for Lease will help tenants whose landlords face foreclosure. As a result, it appears that, though Fannie Mae provided no estimates for how many borrowers will be eligible for the program, Deed Lease looks to be a promising alternative to severely delinquent borrowers with Fannie Mae loans facing foreclosure–and for their tenants.

More information about the program can be found at www.efanniemae.com.

Reflecting on the Impact of an Extended Tax Credit

Last week a bi-partisan deal was announced in the Senate that will likely pave the way for the new homebuyer’s tax credit to be extended through April 2010. The deal also includes plans for a significant expansion of the tax credit, raising the income requirements to $125,000 per individual and $225,000 per couple from $75,000 per individual and $150,000 per couple. This expansion means that many more individuals will be eligible for the tax credit than were previously. Finally, the deal added a $6,500 tax credit will be available to homeowners wishing to move out of their current home into a more expensive one.

I have been thinking about the deal all weekend, and I worry about its effects. While the goal of the credit is to strengthen the market and help bring home prices back up, increasing income requirements and adding a tax credit to incentivize trading up seems like it risks exacerbating the current problems in the housing market. Many of the current problems in the housing market have been created by homeowners (many first-time homeowners) taking out mortgages that were more than they could afford to pay in order to buy homes. Even when they could afford the mortgage, the recent economic problems have led many to be out of work or find their401(k)s and pensions to be less than they had expected. Consequently, the number of foreclosures and mortgage delinquencies reached all time highs in recent months.

In light of these developments, some proposed that maybe homeownership should no longer be an essential part of the American Dream. It was argued that it is a disservice to put people into homes they cannot afford. While the tax credit is not a very large sum of money, it is enough money to push individuals to act in uncertain times. A realtor in Portland, ME commented that nearly 70% of their clients were motivated by the tax credit. Yes, the housing market could use a boost, but when individuals are making a significant long-term financial decision for a short-term financial incentive, it seems like many poor choices can occur.

Reverse mortgages and refinances are available to help homeowners who find themselves over-extended, but reverse mortgages are only available to those over 62, and refinances and short pays have been extremely hard to get. To avoid another housing crisis, the government does need to stimulate the market, but putting more borrowers into homes they cannot afford does not seem to be a safe way to do so.

Breaking News: Deal Announced to Extend New Homebuyer's Tax Credit Through April 2010

The Senate announced a bi-partisan deal yesterday to extend the new homebuyer’s tax credit through April 2010. The deal will extend the $8,000 tax credit, which was set to expire in weeks, on homes with values up to $800,000. While the previous tax credit only applied to homebuyers with salaries of up to $75,000/year for individual and $150,000/couples, the deal raises the requirement, so that the tax credit will now apply to homebuyers with salaries of up to $125,000/year for individuals and $225,000 for couples. This will serve to make the vast majority of homebuyers available for the tax credit. In addition, a new $6,500 tax credit will be available to home owners wishing to move out of their current homes into more expensive ones.

The extension of the tax credit is expected to cost the government $10.2 billion, which will be offset by delaying a tax-break for U.S. based international corporations from 2010 to 2017.

The extension of the tax credit (as well as the new credit for current homeowners) is expected to help the housing market and real estate industry bounce back from the housing crisis. It is hoped that the tax credit, which has been successful in the past year, will help the market return to its former strength in 2010.

Taking in a Renter to Help Pay the Mortgage or Increase Income

An article in the Wall Street Journal today focused on a noteworthy new phenomenon: more homeowners are taking in renters. In some cases, homeowners are taking in renters in homes they still live in as a way to help make ends meet. In others, homeowners are becoming landlords, renting out homes they are unable to sell. This seems to be a popular option when the homeowners are forced to make a quick move- especially in the distressed real estate market. While to qualify for a reverse mortgage, a single family residence cannot be a rental property, nor can any portion of it be a rental property, renting out a home may be a good option for those who do not qualify for a reverse mortgage, but need the income from their home. In addition, multi-family homes with separate apartments may be rented and still qualify for a reverse mortgage as long as the homeowner continues to occupy the home.

There are some additional costs that come with being a landlord. Landlord insurance is about 25% higher than homeowners insurance, and landlords who use property manages may wind up paying them 3-12% of the rent. However, a tenant can be a good source of income, helping homeowners be able to continue to afford mortgage payments or break even on a property. When homeowners need to relocate in a short time frame, taking on a tenant helps alleviate the financial burden of paying for two mortgages at once (or a mortgage and rent).

The Changing Conception of Ownership vs. Renting

A wonderful article in the Wall Street Journal this week focused on changes in buying vs. renting as outgrowths of the American Dream and supported the position that the Obama Administration should turn to helping renters, rather than putting all of its money into revitalizing the housing market. The idea is an interesting one. Before the Great Depression, homeowners were either very wealthy or people who built the house themselves. The vast majority of Americans rented.

Now, home ownership has become synonymous with the American dream. A noteworthy quote mentioned in the article is, “‘A man is not a whole and complete man unless he owns a house and the ground it stands on.” – Walt Whitman. But this change was only completed as the federal government stepped in to dramatically assist and subsidize lenders with the creation of government programs such as the Home Owners Loan Corporation and the Federal Housing Administration. I would also argue that the change occurred partly due to class issues, as wartime and the Great Depression led to the ascendancy of the self-made man and decreased the emphasis on Old Money. Regardless, the change to a society that glorified home ownership was not made until the 1930s, and has still not occured in many European countries, where most rent.

It is true that the Obama Administration has spent a lot of money to try to help stimulate the housing market and keep homeowners that are behind on their mortgages in their homes. The aptly named “Save the Dream” fair in Atlanta this past weekend seems to aptly illustrate this idea that the dream of owning a home is a fleeting one. A report by the National Foundation for Credit Counseling in June found that 1/3 of Americans believe they will never be able to own a home, and 42% of those who owned a home in the past but do not own one currently believe they will never be able to own one again. This is hardly optimistic data for those seeking to restart the home ownership market.

In New York City (and I imagine in other urban areas as well), there are programs in which the government assists low-income families with finding apartments. I believe there are even cases when rents are subsidized, depending on the circumstance. Assisting landlords and tenants may be the best way to help combat the housing crisis. Landlords in default or distress can cause problems for tenants, who may find themselves evicted. In cities where property values are high, many renters can be stuck with rents that amount to more than half their salaries.

Helping renters will help individuals save money, perhaps leading them on the path to home ownership, while, in the meantime, improving their present situation. Although programs such as the reverse mortgage program and the HECM for Purchase program are wonderful ways to help homeowners, the point that renters should be attended to as well (and perhaps instead) of simply focusing on homeowners is a valid one that has been long overdue.

Increasing Number of Homeowners Upside Down on Mortgages

At the end of June, 24% of homeowners were upside down on their mortgages. In other words, 24% of homeowners owed more on their mortgages then their homes were worth. When added to those with no equity remaining in their homes, the percentage climbs to 32%. Nevada, Arizona, California, and Colorado are the biggest offenders with rates of 40%, 37%, 33%, and 31% respectively of homeowners whose homes are worth less than their mortgages. In some of these markets, homeowners are walking away from homes where they may owe twice as much as the home is worth or more. And when the home is worth less than the mortgage, borrowers no longer qualify for some of the programs that might be able to help them, such as a reverse mortgage.

In response, some are urging the government to begin reducing loan balances to help borrowers cope with the problem. Lowering loan payments or rates will only make the mortgages drag out interminably, and still not recoup the home’s equity (unless it appreciates again over time back to levels that are higher than during the time of the boom). If the government reduces the loan balances, borrowers will be inclined to continue to invest in their homes and stay in their residences, rather than walk away. This will reduce foreclosures, hopefully, as well as abandoned properties.

What do you think?

Obama's Homeowner Relief Program Still Excludes Many

While the Obama Administration’s Home Loan Modification Program was supposed to help homeowners who have lost their jobs and are having trouble making their mortgage payments, the NYTimes wrote an article today highlighting the many people whom the banks have been unwilling to help because they have never been late on a mortgage payment before. Some of these homeowners are upside down on their mortgages–others are having trouble simply due to the circumstances of the recession.

Although it is often dangerous to make generalizations solely based on the case highlighted in the story, it is extremely plausible that banks are unsure how to handle customers with good payment histories who are now running into financial difficulties. The banks and government programs seem to be waiting for people to get into a lot of trouble before bailing them out, rather than helping prevent those problems in the first place.

Furthermore, the number of subprime and Alt-A mortgages refinanced in May fell 11 percent from April, according to research by Alan White at the Valparaiso School of Law. Given the record number of homeowners behind on their mortgage payments or facing foreclosure, this statistic is problematic and disturbing.

Many of those affected include seniors. The woman profiled in the article, Eileen Ulery, is 63, old enough to qualify for a reverse mortgage. However, her property is upside down, meaning she would be likely to face a shortfall.

While I agree that on a scale of priorities we should be helping those whose circumstances are most dire first, it does not seem to correlate that homeowners who have been responsible are being penalized. Bank of America Home Loans is quoted in the article as saying they are still putting the programs in place for those not facing a severe threat of foreclosure. I would hope that those programs are as inclusive as possible, and put together soon so that these individuals do not end up in a dire situation before they can get help.

Financial Counseling May Help Homeowners Avoid Foreclosure

A recent New York Times article focuses on Fannie Mae’s HomeSaver Advance Program, a now-deemphasized program that gave borrowers up to 15,000 in unsecured personal loans to cover missed mortgage payments. However, 70% of the borrowers who took out these loans defaulted. This instance helps highlight the importance of financial counseling. The article closes with the example of a New York City program that makes foreclosure avoidance loans available to borrowers who have undergone counseling. This program has given out 15 loans so far, none of which have defaulted.

Reverse mortgage counseling has come under fire recently, and several states have been debating whether to pass legislation requiring counseling before all reverse mortgage transactions. It is often argued that counseling is necessary in order to ensure that the senior borrower understands the reverse mortgage transaction, but if one looks closely, it appears that counseling has the potential to do a lot more than that. As counselors at the NRMLA Orlando Road Show explained, the purpose of counseling is partly to make sure that the borrower will still have enough money to live on after the reverse mortgage. The financial counseling portion of the reverse mortgage counseling process is perhaps underestimated, but it articles such as the one referenced above help show that financial counseling may be another way to help homeowners avoid foreclosure–and ensure that the steps they take in the short term will not penalize them in the long run.

Record 12% Of Homeowners Behind on Mortgage or in Foreclosure

In more depressing housing news, the Mortgage Bankers Association announced Thursday that a record 12% of homeowners are behind on their mortgage or in foreclosure. They do not expect the number of foreclosures to crest until the end of next year.

In an interesting twist, the foreclosure rate on prime fixed-rate loans has doubled in the last year. They now comprise the largest share of new foreclosures. The financial crisis has also hit many of those previously thought to be invulnerable: Nearly 6% of fixed-rate mortgages to borrowers with good credit are in the foreclosure process.

The foreclosures also appear to be clustered: 46% are located in California, Florida, Arizona, and Nevada.

We’ve tried to keep much of the blog focused on how to get out of foreclosure for those who are affected by the crisis. Those over the age of 62 can qualify for a reverse mortgage, which can help many avoid foreclosure. There are also many state resources that can assist, such as the one in Illinois discussed here.

If there are any options I’ve left out, please comment with them.

15 year Fixed Rate Mortgages Become More Popular

A NYTimes graph displaying traditional forward mortgage rates for the NY region

Although reverse mortgages require no mortgage payments, many homeowners still have traditional forward mortgages. It is in the context of this traditional market that the following information applies:

The New York Times reported this weekend that 15 year fixed rate mortgages have surged in popularity recently. The number of 15 year fixed rate mortgages increased 56.6% from January to February. While these mortgages may seem attractive, sometimes saving borrowers tens of thousands of dollars in interest payments, lenders counsel that with higher payments, those with 15 year mortgages are more likely to have trouble making payments should they lose their job or encounter another financial emergency. One lender in the article proposed getting a 30 year mortgage and making the payments to pay it off in 15 years, but that way if there were an emergency, the borrower would have a cushion.

I do think that unorthodox thinking appears to be one of the best ways to get through the recession and through nearly any crisis. It is unsurprising that borrowers are looking for low rates (rates on the 15 year fixed rate mortgage are the lowest they’ve been since June 2003). In addition, being able to pay off a mortgage in 15 years is becoming a more and more tempting opportunity for borrowers who don’t want to have to make mortgage payments in retirement–another factor that has made reverse mortgages tempting.