FLYNN: Fannie Mae rolls out new tool for homeowners facing foreclosure

The Federal National Mortgage Association — better known by its nickname Fannie Mae — recently announced a new tool intended to keep people facing foreclosure in their homes. Fannie Mae calls this program Deed-for-Lease, and it is sufficiently proud of the program that it claims a trademark on the name.

The new program, at least in concept, is simple. If your home is in (or headed for) foreclosure and you don’t qualify for a rescue in the form of a refinance or a loan modification under other federally-subsidized programs, you can deed your home to your lender and then lease it back. This will save the lender the cost of a foreclosure — maybe $2,000 to $4,000 — and, according to Fannie Mae’s public relations department, help stabilize home prices and minimize neighborhood deterioration caused by vandalism of and theft from vacant homes. The leaseback can be for up to a year, with possible renewal options after that. Rent will be at a market rate.

Whether Deed-for-Lease will have much of an impact remains to be seen. To qualify, a borrower will first have to jump through numerous hoops associated with the deed-as-alternative-to-foreclosure part of the program. (See Fannie Mae Servicing Guide, Part VII, Section 506.) If the borrower makes it past that, and is in fact interested in a leaseback, a Fannie Mae representative then will contact the borrower, visit the property, and evaluate both. If, after this evaluation, the lights are still green, a lease will be signed and the loan servicer will complete the process of obtaining a deed to the property.

For the lights to go green, numerous conditions must be met, to wit:

• The loan must be a first-
mortgage loan. If there is a second mortgage on the property, the second mortgage lender will have to release its lien.

• The borrower must either occupy the property as a primary residence (no Beaver Creek ski condos here) or have leased the property to someone else who occupies the property as a primary residence.

• The market rent the borrower will pay can’t exceed 31 percent of the borrower’s verifiable income. In addition to paying rent, the borrower must be able to — and willing to — cover the cost of regular maintenance during the term of the lease. (This strongly suggests that borrowers who are in foreclosure because they no longer have an income will not qualify for the program.)

• The borrower must have made at least three payments on the loan in question, and can’t have more than 12 payments past due.

• The leaseback must not cause a violation of zoning or homeowner association rules. The property must be in reasonably good condition. The number of occupants at the property must be appropriate for its size.
Special rules apply if there are pets.

• There can be no signs of illegal activity at the property and all occupants older than 18 must undergo a satisfactory background check. This includes clearance from the Office of Foreign Assets Control. (Apparently Fannie Mae, which has not had good press in recent years, does not wish to be accused of harboring terrorists.)

If you think the Deed-for-Lease program might be of benefit to you, contact your loan servicer. Information about Deed-for–Lease can be found at Fannie Mae’s Web site, www.fanniemae.com; search for “deed for lease.”
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Jim Flynn is a private attorney at Flynn Wright & Fredman LLC in Colorado Springs. The firm primarily represents clients in the real estate, financial services and small-business sectors. Reach him at jtflynn@fwflegal.com.