So You Cant Pay Your Mortgage? How About Paying Rent?

Fannie Mae is due to roll out a program that is aimed at those homeowners who are facing foreclosure and the eviction from their home. Whether they bought at the peak of the market or faced a financial setback that prevents them from being able to make mortgage payments, they, like many others are in trouble.

Called the Deed For Lease Program, these homeowners that can’t modify their payments will be able to give the deed over to Fannie Mae and in return pay market rent for a year.  Depending on when the house was purchased, size of the mortgage and the interest rate, the rent that they will pay could be less than the mortgage payment that they could not make.

This program will help to keep the amount of foreclosed property hitting the auction block down, which may keep home prices firm as the inventory that needs to be worked off can shrink. At least in the near term. The argument also exists that this will help neighborhoods maintain value, as foreclosed and unoccupied homes are not good for sales. For Fannie Mae, the very troubled lender, this program will allow them to hold off on fire sale pricing, with the potential that the home market will potentially rebound even more over the year that these homes will be off of the market.

The flip side of the coin is that by putting off the inevitable, which is that these homes will be coming onto the market at some point in the future, the glut of inventory continuing to exist will remain out there in the shadows, creating an overhang that will keep holding the market back.

Because the situation in employment shows no signs of getting better any time soon, when will it be a good time to unleash these homes onto the market? People with no job, or facing the uncertainty of the longevity of a current job are not motivated buyers of homes. So would it be better to dump them out onto the table in order to allow the market, once and for all, to cleanse itself.

Judging by the past performance of Fannie Mae, it would be the cynical bet to assume that whatever path they take is the wrong path. That a foreclosure sale now is preferable to the rental scenario. But let’s give them the benefit of the doubt.