August 21, 2012
Citigroup joined a growing number of major national lenders that are letting struggling homeowners stay in their homes by renting.
Fannie Mae and Freddie Mac, along with Bank of America, are offering various programs where homeowners struggling to pay their monthly mortgage sell the property to the mortgage lender, which turns around and rents it back to them.
The idea has been championed for years by housing advocates, who have been pushing banks and elected officials to adopt it.
“If you can prevent foreclosures, that’s the obvious thing you want to do,” said Dean Baker, co-director of the Center for Economic and Policy Research, who has been advocating for the right to rent since 2007. “But the point is you’re preventing (houses) from sitting vacant and depressing a property values. It’s kind of a no-brainer.”
But there’s been pushback from other lenders, who have been slow to warm up to the idea.
Fannie and Freddie’s programs are three years old, but receive little attention from the companies themselves. Freddie Mac’s program barely qualifies as a deed-for-lease program, offering only month-to-month rental options for homeowners who have already undergone foreclosure. Fannie Mae offers year-long leases before the foreclosure process begins.
It wasn’t until this year that the idea gained traction with banks. Bank of America began piloting its Mortgage to Lease program with 1,000 targeted customers in March and CitiMortgage announced its Home Rental Program this month, aiming at helping an initial 500 customers.
Finding a solution to stem the tide of foreclosures is key, according to mortgage lenders.
“In addition to helping families by keeping homes occupied, the program assists neighborhood revitalization and stabilization efforts, which are crucial to our nation’s recovery,” said Sanjiv Das, CEO of CitiMortgage.
But none of these programs offer a way for these homeowners-turned-renters to become homeowners again. While the former homeowner is renting the house, the lender is looking for an investor to take over the property - regardless of whether or not that investor has any interest in maintaining the renter relationship.
The American Equity Foundation, a non-profit organization out of Washington, DC, offers a similar program, but the company’s end goal to get homeowners back into their homes as homeowners, is a little different. The company facilitates a short sale with investors, then rents the property back to the homeowners. AEF works under the federal government’s Neighborhood Stabilization Program, which allows the homeowners to stay in their homes, though they normally would not under a typical short sale.
Homeowners-turned-tenants are then enrolled for free with alternative credit agency eCredable to re-establish their creditworthiness with the hopes they will be able to buy the home back after one to four years. (Full disclosure: I have provided credit education content to eCredable, which is available to members only.)
But not everyone qualifies for the AEF program. Homeowners must be able to afford the market rate rent on their property, and put down $2,000 toward their first and last month’s rent as well as pay a $299 underwriting fee. That eliminates lots of cash-strapped homeowners who would otherwise want to be in the program.
AEF’s investors collect rent along the way and profit when the home is sold - assuming the upgrades AEF provides as well as an improvement in the local real estate market translate into rising home values. They will then sell the home back to the original owner for more than than the purchase price. AEF also offers owners a 7 percent simple interest rate plus taxes and insurance.
Founder and CEO Christopher Nelson says it’s a win-win-win for all parties. The banks get a potential foreclosure off their books, the families stay in their homes and AEF’s backers turn a profit.
“This is the capitalistic, American approach to solving the housing crisis,” Nelson said.
He says AEF gets 400 to 500 requests every two to three days.
Investors across the country are looking to get into the rental business - regardless of whether it helps homeowners or not. Sylvan Road Capital LLC, an Atlanta-based asset management firm, announced last week that it will invest more than $1 billion into distressed homes and convert them into rentals.
The supply is increasing as well, as HUD announced it would auction off $1.7 billion in distressed loans in September.
“You just hope [these programs] will encourage some new thinking,” Baker said. “We’re having outcomes that are bad for everyone. Foreclosure ends up leaving abandoned property is in bad shape in the middle of our neighborhoods. It costs the lender a lot of money and they really should not want that.”