-
As inventories of foreclosed homes pile up, some banks and mortgage investors are turning to a new group to help lighten their load: renters.
March 9
The foreclosure crisis has turned Fannie Mae and Freddie Mac into big property owners, but neither has become a significant landlord.
A program Fannie adopted in January, under which it offers month-to-month rentals to tenants living in properties it has seized, has produced only 142 active leases. The government-sponsored enterprise said many tenants instead opt for a cash alternative to help them move.
Likewise, at Freddie Mac, which since March has offered leases both to tenants and to former borrowers who have been foreclosed on, most occupants have chosen "cash for keys" over the relative instability of a month-to-month rental agreement.
The GSEs said they consider the programs successful. Their aim is simply to ease the transition, one way or another, for tenants and borrowers as the GSEs dispose of seized properties. The programs were not meant to be a structural answer to the deluge of homes moving through foreclosure.
But the slow uptake of leases is another example of the hit-or-miss nature of efforts to deal with the foreclosure crisis. Tens of thousands of properties flood mortgage companies' inventories each quarter. The vacated homes blight neighborhoods, sap financial institutions' resources and drag down housing markets.
For lenders and investors stuck with these assets, a tenant can mean a source of income from a property that would otherwise decay while unoccupied and more time to arrange a sale in a difficult market.
"The root of the question is: Do we try to sell this property now, as quickly as we can, which usually translates into a cheaper price, or do we try to hold onto it and keep the tenants in place so it is income-producing?" said Travis Hamel Olsen, the chief operating officer at Loan Resolution Corp. His Scottsdale, Ariz., company services troubled mortgages and specializes in arranging short sales.
In addition to the roughly 200 leases Fannie has executed so far, it has offered 77 leases to tenants and is reviewing 71 lease applications. That compares with the 57,469 single-family properties Fannie took over through foreclosure in the first half, which, net of the 58,392 properties it unloaded during the same period, left it with an inventory of 62,615 seized single-family residences.
Many properties that Fannie has seized, of course, were occupied not by tenants but by borrowers. The GSE has a little more than 1,800 properties with tenants who have not yet gotten either a lease or "cash-for-keys" agreement with Fannie. (The latter is aid Fannie gives tenants who decide to vacate seized properties; it can include one month's rent.) More than 3,500 tenants have accepted cash-for-keys offers this year, Fannie said.
"We want to make sure that these tenants, who are falling victim to foreclosure because their landlord … did not make payments on their home, have the option to either stay in that home because they have kids embedded in the school system or whatever other reasons there may be, or provide them a smooth transition and a graceful exit by providing relocation and some additional financial assistance," said Amy Bonitatibus, a Fannie spokeswoman.
Brad German, a Freddie spokesman, said the McLean, Va., company's program was developed "to give borrowers and renters who are caught in the foreclosure crossfire an opportunity to rent on a month-to-month basis" while Freddie shows their homes and tries to sell them.
Freddie checks to see whether properties are occupied after it seizes them and offers leases to eligible residents. Typically, 50% to 60% of the properties it takes over are not occupied, and most residents decide to accept payments to help them move on.
"Another significant segment of the potential renter population simply vacates on their own without cash-for-keys," German said.
The company declined to specify how many leases it has made. Freddie took over 35,987 properties through foreclosure in the first half, bringing its net inventory to 34,706 after accounting for properties sold during the period.
One recipient of relocation assistance was a 73-year-old woman in Rochester, N.Y., who was facing eviction in June from an apartment she had rented for 19 years. According to her attorney, Michelle DeMareo of the Monroe County Legal Assistance Center, the woman encountered a series of dead ends while seeking more time to move from the real estate agent and the local attorney who were handling the foreclosure, and from a Fannie consumer hot line.
Ultimately, the tenant got a deal under which she received $1,500 and agreed to vacate the apartment by Sept. 2. But the process "wasn't pretty," DeMareo said.
She speculated that the low number of leases, and instances in which tenants simply vacate without compensation, could be explained by miscues in communicating the availability of rental and cash-for-keys help while the eviction process begins. "They're desperate, and they're scared to death that they're going to end up in a homeless shelter, so they leave as soon as they can."
To an extent, the GSEs' policies of continuing to rent to tenants of seized properties have been superseded by a recent federal law that prevents lenders from forcing tenants out.
Among other things, the Protecting Tenants at Foreclosure Act, which took effect in May, requires companies that seize properties to assume existing leases for the remainder of their terms. (Leases can be terminated with 90 days' notice if the property is sold to someone who plans to occupy it as a primary residence.)
Dean Baker, the co-director of the Center for Economic and Policy Research, has been an early and active proponent of a more sweeping approach, calling for legislation that would give former borrowers the right to enter into long-term leases on properties they have lost to foreclosure. (If the properties are sold, the buyers would be required to assume the leases.)
Baker has advanced the rental option as a solution to mounting foreclosures that provides no windfalls to borrowers, since they lose ownership of their homes, and requires no taxpayer money.
In part, the idea is to minimize disruptions to neighborhoods caused by large numbers of vacant homes through the engineering of an orderly transformation of a potentially large portion of owner-occupied housing into rental stock, and allowing residents to stay put.
According to an analysis the center published in July, bubble prices have probably left many homeowners who bought during the boom's peak years with mortgage burdens far exceeding market rents — the gap may be on the order of $1,500 to $2,000 a month in places like the Los Angeles area.
But if a borrower who is headed toward foreclosure can afford a market rent, it may make more sense for the lender to simply reduce the monthly loan payment to the affordable amount through a modification and avoid the hassle and costs of foreclosing and becoming a landlord. Baker has argued that his plan would give troubled borrowers more bargaining power to seek modifications, since lenders would not be able to seize unencumbered properties, and would drive down foreclosures overall.
Others see a business case for offering long-term leases to the former owners of seized homes.
Steven Horne, the founder and president of Wingspan Portfolio Advisors LLC, a Carrollton, Texas, servicer that specializes in highly delinquent loans, said he has argued for a couple years that the "lease-to-own structure is potentially a good, legitimate successor to what was formerly a big chunk of the subprime borrower base."
Rental arrangements may let lenders and investors unload properties "in a more controlled fashion for a better price," particularly in neighborhoods that have been hit hard by a glut of homes going on the market, depressing prices, he said.
Horne acknowledged, however, that many of the investors buying distressed assets have little interest in establishing or managing tenant relationships. "They want to turn that property over as quickly as possible — sell it for what they can get for it and move on to the next deal," he said.
And for banking companies, the encumbrances of property management lie on the uncomfortable side of the wall between finance and commerce.
"No bank wants to be a landlord," said Edward J. Fay, the chief executive of Fay Financial LLC, a Chicago mortgage servicing and investment management firm.
In nearly all cases, the cash flow from a borrower who can afford rental payments would outweigh the amount of money that could be recovered in a seizure and sale of the property, Fay said.
For that reason, "I'd just keep them in the mortgage" through a modification, he said. "At the end of the day, I'm still going to have an eviction process to deal with if the person stops paying on a rental," and renting confers responsibility for property upkeep on the former lender.
Loan Resolution Corp.'s Olsen identified another potential pitfall of renting: It could expose lenders to a variant of "ruthless default," if borrowers who can actually afford their loans trade into lower rental rates. But generally, he said, when a property enters foreclosure, "that homeowner has pretty much put their money where their mouth is, saying that, 'Hey, I can't afford this mortgage and, hey, let me prove it to you: Here's the house back.' "
