Fannie Mae unveiled a new program today that would allow struggling borrowers unable to obtain a loan modification to enter a lease and effectively rent their home at market value back from the lender.

The program, called the Deed for Lease Program, begins today and lets homeowners who haven’t been able to negotiate a workout with their lender sign a lease, voluntarily transferring the property deed back to the lender with a deed in lieu of foreclosure. The borrower would then lease the house back for the market rate in rent, which in many areas is significantly different from the cost of owning. Homeowners will then be able to stay in their homes for up to 12 months, at which time the lease may be able to be extended on a month-to-month basis.

“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.”

Other criteria to qualify for the Deed for Lease program includes:

  • The borrower must live in the home as their primary residence or lease it to residents who use it as their primary residence (Tenants may be able to take advantage of the program as well).
  • The borrower must have made at least three payments since the loan began or was last modified.
  • The borrower cannot be more than 12 or more months past due on their mortgage loan.
  • The borrower cannot be involved in an active bankruptcy proceeding or involved in litigation over the property.
  • The borrower must have a title insurance policy.
  • The occupant of the property (borrower or tenant) must have an income and be able to prove that the market rental rate is no more than 31 percent of their gross income.

If a property under the program is sold, the lease assignment is included in the sale to the buyer. FHA, HUD, VA and Rural Development loans are not eligible.

“Many homeowners who could not sustain mortgages based on the original purchase price, even with sharp reductions in interest rates, can afford the market rent,” Dean Baker, co-director of the Center for Economic and Policy Research said in a statement. “The Deed for Lease Program is a very big step toward giving these families housing security in these situations. Families that like their home, their neighborhood, or the schools for their children will have the opportunity to stay in their house even after foreclosure.”

Baker added that the program will also benefit foreclosure-ridden neighborhoods to keep homes occupied rather than creating more abandoned and torn-apart residences. Additionally, Fannie Mae said the program hopes to minimize family displacement and stabilize home prices.

While the one-year lease option is an move in the right direction for the housing crisis, only having the possibility of a lease renewal is limiting, Baker said. Extending the guaranteed lease period to five or 10 years would provide more security.

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