Fannie Mae announced today it’s implementation of the Deeds for Lease Program (which name, interestingly, they have trademarked). I cannot begin to count the problems with this latest attempt by the government to sober up an alcoholic nation by supplying enough booze to drown a water hippo.
You can read the press release and imagine the nightmare yourself so I’m not going to recount it here, but I will point out one of the less reported aspects of this program that has the potential to cause a whole lot of those pesky unintended consequences our political leaders are so loathe to anticipate:
… (the borrowers or tenants) lease back the house at a market rate… 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.
Interesting wording there at the end. It’s not clear at first glance, but what this means is that if the borrower – who has generally endured a financial hardship to begin with – doesn’t make enough money, they’re still eligible… the rent will just have to drop to below market. Well what could go wrong with a government/landlord artificially lowering rents throughout the nation… That shouldn’t bother anyone who works with real estate investors should it? Anyone here, reading BHB, work with real estate investors? I didn’t think so. Sorry to have brought it up. I’m sure the people who paid $70,000 for $30,000 trailers that are STILL housing people post Katrina know exactly what they’re doing.
Mark Madsen says:
So, it’s a simple game plan:
a) stop paying mortgage because house is underwater
b) take all money out of bank acct so that you have nothing to show
c) get any job that you like, regardless of the salary, because the government will supplement your income / expenses
d) wait 14 months for lender to foreclose on you (saving a ton in monthly mortgage payments)
e) rent your home back from the government at 31% of your debt-to-income ratio
f) skip every third monthly rent payment and threaten to trash the house if the government sponsored property management company talks about eviction –
*the property management company probably won’t care too much about enforcing timely rental payments because the government (tax payers) will pay them their cut every month regardless
November 7, 2009 — 9:06 am
Robert Worthington says:
I’m only guessing but for the lazy people in this world uncle obama would make a great landlord; after all everyone, even lazy people deserve a chance.
November 7, 2009 — 11:11 am
Cheryl Johnson says:
Well, all kidding aside, I see an opportunity here. Does anyone know where I go to register our company for consideration as a property management company for the program? I’ve been searching the web and haven’t found the info yet. Thanks!
November 7, 2009 — 11:52 am
Robert Kerr says:
First of all, I don’t like that we’re in this situation, but it is what it is, and this seems to me like a reasonable solution to the problem at hand.
Aside from opposition on purely ideological grounds, which is all I’ve seen so far, what’s wrong with this idea?
Does anyone have alternative solutions to offer?
November 7, 2009 — 12:16 pm
Greg Swann says:
> Does anyone have alternative solutions to offer?
Let the market shake out. Interference like this is what made the Great Depression so great.
November 7, 2009 — 12:26 pm
Robert Kerr says:
Let the market shake out. Interference like this is what made the Great Depression so great.
Hi Greg … can you be more specific than “market shake out?”
Are you suggesting repossession/forelcosure/eviction and eventual resale?
Or something else?
November 7, 2009 — 1:09 pm
Don Reedy says:
Let’s have all the banks lower the interest rate on existing home loans to, say, 4.5%. If you’ve been in trouble because your home has declined in value, and if this rate “saves” you, then great.
As for the other millions of homeowners like myself who are good citizens and currently paying higher than the 4.5% “government option rate”, kudos to our Congress and Fannie for thinking of me at this very difficult time. I’m sure I’ll “stimulate” the economy with the extra dollars I’m saving on my current mortgage.
Robert> “Are you suggesting repossession/foreclosure/eviction and eventual resale?:
Gregg can speak for himself; but for me the answer is ‘yes.’ Violate a contract; abide by its terms. We used to say “live by the sword, die by the sword.” Now, with all this government intervention, “Change”, I think is the buzzword, we should instead say “Love by the word, die by the word.”
November 7, 2009 — 3:52 pm
Sean Purcell says:
@Mark – Perfect! A step-by-step; this should be a pamphlet that goes out to every potential “tenant.”
@Robert W – lazy people do get a chance, same as the rest of us. Or did you mean everyone, even lazy people, should get a chance to contribute to the great collapse?
@Cheryl – I wish you the best of luck, but I wonder if you really have the time to become a bureaucrat… government enterprise not being known for its efficiency.
@Robert Kerr – …reasonable…? What could you possibly find reasonable in this program? Home owners are absolved from life’s lessons, banks are absolved (again) of risk management, responsible homeowners are absolved of incentive and landlords/investors are absolved of a profit motive. That’s a lot of absolving. Sounds more like religion than economics. Welcome to the church of the Neo-Progressive. Alternative solution? Greg pretty much nailed it: don’t make the problem worse, simply let failure fail and allow resources to move based on impact rather than fiat.
November 7, 2009 — 5:03 pm
Sean Purcell says:
@ Don – Violate a contract; abide by its terms Now I’ll bet that one’s got the neo-pros falling out of their chairs in laughter. Contracts? These are the same people who negated the superior standing of bond holders over stock holders and… union members (good God that sounds more asinine every time I write it). How in the world are we supposed to have an orderly equities market never mind honor minor mortgage contracts? That’s a good one Don! 🙂
November 7, 2009 — 5:14 pm
Tony Sena says:
Cheryl, I was wondering the same thing and I couldn’t find any information on how to register my firm.
November 7, 2009 — 8:54 pm
James Boyer says:
Sounds like a real loser to me. Foreclose, Evict, Sell off the property, and move on. Enough of this loan modification nonsense, outlaw the damn short sale bull s#!^ and be done with it. Do I sound fed-up? well I am a bit fed-up, especially with the short sale listings that buyers are interested in because they are priced under market, but never actually sell because the bank will never actually approve it.
November 8, 2009 — 10:59 am
Robert Kerr says:
RE: “What could you possibly find reasonable in this program?”
It’s a cheaper process than foreclosure, it doesn’t depress local property values, doesn’t add to the (already massive) inventory of distressed properties in the area, and the property isn’t left vacant for months or years, which bring with it the threat of squatters and vandalism and the costs associated with maintenance.
It’s not a perfect solution, but it’s a damn good one.
RE: “Home owners are absolved from life’s lessons”
Unless you want a return to Debtors’ Prisons, we all have the right to walk away from debt – including Greg, from his own foreclosed home in Phoenix.
And I challenge your claim that walking away means no lesson learned.
RE: “Alternative solution? Greg pretty much nailed it: don’t make the problem worse, simply let failure fail and allow resources to move based on impact rather than fiat.”
If Greg is referring to the existing process of foreclosure (he has yet to clarify), I should remind you both: that’s one of the costliest options for the lien holder, the local real estate market and the neighborhood.
November 8, 2009 — 5:51 pm
Greg Swann says:
> Unless you want a return to Debtors’ Prisons, we all have the right to walk away from debt – including Greg, from his own foreclosed home in Phoenix.
Sorry to disappoint you. My mortgage is current and performing. It seems wiser to me lately never to say never, but, so far in my life, I’ve never defaulted on a debt. If honor and hard work are worth anything is what is fast becoming a looter’s economy, I never will.
For the rest of all of this, so as not to seem to encourage you, we all know that the least painful way of recovering from malinvestment is a short, sharp shock — shakeout. This FannieMae scam is just tax-payer subsidized price supports for assets that the free market deems as being over-valued. The liquidation sale is a sad sight, and no one wants to look the auctioneer in the eye. But every other approach destroys even more wealth than liquidation. If you actually want to reform something, get rid of Fannie, Feddie, FHA, VA and USDA. The real estate market has been thoroughly screwed up by Rotarian Socialism. Trying to paper over the past set of crimes with a new style of looting will only make things worse. None of this is news.
November 9, 2009 — 1:19 am
Robert Kerr says:
RE: “Violate a contract; abide by its terms.”
Excuse me? What?!
The contract holder itself is proposing these new terms. How is anyone violating the terms?!
November 8, 2009 — 6:00 pm
Sean Purcell says:
@Robert Kerr – You’re suggesting that Deeds for Lease is a cheaper process than foreclosure, but then government programs are always cheaper… so long as you don’t count the actual cost to the government (us). It’s quite possible that this process will be cheaper for the banks and for the homeowners that can’t pay their existing mortgage, but how is subsidizing the mortgage payment for twelve months (ha, ha) of people who can’t afford a home and then going to… foreclosure? short sale? What’s the next step in this vision? How is that cheaper? I won’t even get into the notorious inefficiencies of the government. Even if they could implement this program as efficiently as… oh, say a private enterprise (gee, there’s an idea) how would it be cheaper? By the way, it this were a good idea, private enterprise would have already suggested it. Try to imagine a way in which a private company could do what Congress is suggesting and make money. Mortgage factoring? Equity for subsidy? Does anyone expect a nice return on home values in the near future? They can’t – which makes it a cost almost by definition.
Also, in some parts of the country (I can speak for San Diego) they are dying for more inventory. And the vacancy issue is a non-starter. Don’t like vacancies? The banks should rent the homes our after foreclosure then. Yeah, but they don’t? I wonder if that means it too damn expensive? No worries: the government can do what private enterprise can not…
Not sure how you’re relating learning life’s lessons w/ debtor’s prison. I simply want their to be repercussions and responsibility, not a medal for everyone who tried. Even less sure how your subtle ad hominem at Greg pertains…
Finally, if foreclosure is so expensive why do they do it? If there’s some cheaper, better solution why aren’t we doing that already? I’ll never cease to be impressed with some people’s ability to look at a government program and say to themselves: “well, it is true that just about every program the government has ever tried has been much more expensive than suggested and much less productive… but this time I think we’ve got it figured out.” They don’t have it figured out – but they sure do know how to make it look pretty.
November 8, 2009 — 6:36 pm
Sean Purcell says:
@Robert Kerr
The contract holder itself is proposing these new terms. How is anyone violating the terms?!
Ah, no… the government is proposing (imposing?) this. Although the contract holders might appreciate it in the same way they enjoy zero cost money and risk ameliorating bail-outs.
November 8, 2009 — 6:41 pm
Don Reedy says:
Robert,
I don’t believe it’s okay to “walk away from a debt”, at least without some sense of the morality attached to agreements, understandings, social and legal contracts in general. But, of course, this set of beliefs is not widely held any longer, as witnessed by many of the comments here on various topics over the years.
No, I’m sticking with my contribution to Sean’s post. It IS a violation of the contract if one of the participants decides to blow the contract off. Just because, as you say, the “holder” doesn’t object, don’t think for one moment that a violation has not occurred.
Legal violation? No. I’m talking, and I believe Sean is discussing, the continuing, longstanding practice of believing we can legislate, even matriculate, around morality, and somehow find our way to a better place.
Financial violation? Yes, almost for certain. Sean, has nailed this violation succinctly. There clearly is no financial advantage. I know this because I see no capitalists, hedge fund managers, or Vook investors riding this wave.
Moral obligation? Do moral obligations even exist, you ask? For me, certainly and absolutely. For others, alcohol and hippos are part of the answer, not part of the question…….
November 8, 2009 — 8:23 pm
Sean Purcell says:
For others, alcohol and hippos are part of the answer, not part of the question…….
Damn that’s good Don.
November 8, 2009 — 8:58 pm
Robert Kerr says:
RE: “By the way, it this were a good idea, private enterprise would have already suggested it.”
They already are! It’s called “deed in lieu.” This is deed in lieu with a guaranteed tenant. Fannie (and Freddie, which already has a similar plan) didn’t think this up, they copied private enterprise.
RE: “Does anyone expect a nice return on home values in the near future? They can’t – which makes it a cost almost by definition.”
That’s a strawman argument, Sean. I’m not saying this is a money-maker, only that it’s a good solution for the existing situation.
RE: “The contract holder itself is proposing these new terms. How is anyone violating the terms?! … “Ah, no… the government is proposing (imposing?) this.”
Isn’t Fannie the lien holder? And isn’t Fannie is the GSE proposing the Deed for Lease program?
November 8, 2009 — 9:55 pm
Robert Kerr says:
RE: “It IS a violation of the contract if one of the participants decides to blow the contract off.”
It’s a violation to agree to new terms?! RIDICULOUS!
November 8, 2009 — 9:59 pm
Robert Kerr says:
And let’s close the book on the false claim that “the government is imposing this on private lenders.”
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0933.pdf
“Servicers may recommend D4L to Fannie Mae for any conventional mortgage loan held in Fannie Mae’s portfolio, or for mortgage loans that are part of an MBS pool that has the special servicing option or a shared-risk MBS pool for which Fannie Mae markets the acquired property (referred to as Fannie Mae loans).”
November 8, 2009 — 10:12 pm
Sean Purcell says:
with a guaranteed tenant.
That’s the part that scares me…
I’m not saying this is a money-maker, only that it’s a good solution for the existing situation
A good solution is a money maker… welcome to capitalism.
And isn’t Fannie is the GSE proposing the Deed for Lease program?
You might have a point there – I guess that’s the problem with the government owning the means of production: there’s no difference between the government imposing anti-free market solutions and… the government imposing anti-free market solutions.
It’s a violation to agree to new terms?! RIDICULOUS!
No, it’s ridiculous to impose new terms on all the market participants who operated under the original agreement and have no economic say in the new terms (see e.g.: Ford).
November 8, 2009 — 10:16 pm
Sean Purcell says:
And let’s close the book on the false claim that “the government is imposing this on private lenders.”
Right you are. They’re not imposing this any more than the mob imposes a protection fee on legitimate business. You don’t have to play along – although you might find yourself running into a few “economic problems” if you don’t.
BTW, what’s your answer to my main point, which was how will all the real estate investors (and investors’ agents) deal with de facto government imposed rent control? That’s worked so well in the past hasn’t it?
November 8, 2009 — 10:25 pm
Robert Kerr says:
RE: “Right you are. They’re not imposing this any more than the mob imposes a protection fee on legitimate business. You don’t have to play along – although you might find yourself running into a few “economic problems” if you don’t.”
Oh, Sean. The servicers recommend the loans, Fannie loans, for the D4L program. No one is forcing anyone.
Seriously: can you admit when you’re wrong?
RE: “BTW, what’s your answer to my main point, which was how will all the real estate investors (and investors’ agents) deal with de facto government imposed rent control? That’s worked so well in the past hasn’t it?”
I have to wonder if you took the time to read the actual program details, or just the twisted – and somewhat paranoid – misinterpretations of it found throughout the blogosphere.
“Govermnment inposed rent control?” Once again, the SERVICERS recommend loans for D4L, FANNIE LOANS.
November 8, 2009 — 11:14 pm
Sean Purcell says:
Robert, I admit when I’m wrong freely (and more often than I’d like). But you’re playing games here discussing the source of the recommendation whereas I am discussing the much larger (and inherently more economically dangerous) effect of the recommendation. Of course the servicer goes along with this program: it’s another in a series of bail outs. The “servicer” collects a false-market income (made up of rent plus government subsidy). The owner gets to stay in a home they cannot afford. Everyone comes out ahead… except the neighbors (who have learned, once again, that playing by the rules not only does not benefit them but actually puts them at a disadvantage), the current and future real estate investors (who learn that their calculation of fundamental property value can be made injurious by fiat) and the agents who represent those same investors (who realize that they cannot represent their real estate investor clients with any degree of economic accuracy).
Try to widen your view from “who is the source of this theft?” to “who is impacted by it?” A free market dictates the value of rents and property values. Attempting to decide by “centralized command” or “best for society” or even a belief in “a good solution for the existing situation” not only fails every time it is tried, it leaves a trail of (economic) devastation along its path.
November 8, 2009 — 11:54 pm
Sean Purcell says:
@Greg
Not that you care one way or the other, but I continue to be embarrassed by the power of your brevity.
November 9, 2009 — 1:52 am
Robert Kerr says:
Disappointment? Not at all! Glad to hear it. I guess I missed an update since the original foreclosure post. Sorry.
November 9, 2009 — 9:05 pm
Linda says:
As a potential real estate investor, I do see the danger in this program. If the Government has the right to arbitrarily dictate the rental market, how can I re-coup my expenses if the rental market declines because so many people decide to default on their loans and rent back at a much lower rate? Maybe my cash is better left under my mattress since nothing is worth investing in these days…
November 10, 2009 — 2:59 pm