Loan Modification Alternative: Is Renting Your Home a Good Option

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Loan Modifications do not seem to be the solution Government hoped it to be. It is having some success, over 650,000 trial loan modifications, but the floodgates of foreclosure risk homes are not even close to being closed. Of the 650,000 trial loans only 1,711 borrowers got a permanent loan modification. Many experts predict that few of the trial loan modification will work long term and that most troubled borrowers will ultimately foreclose on their homes.

This bleak outlook has made Government and Federal Agencies look elsewhere to provide alternative options to loan modifications. One of these options, Deed for Lease, we mentioned last week and we are going to take a second look at it.

This option which has been kicked around in the nationwide housing crisis debate was finally taken on by Fannie Mae which has started to offer leases of up to 12 months when other avenues to keeping families in their homes, like loan modifications are unsuccessful. Some like Dean Baker, co-director of the Center for Economic and Policy Research see it as a great step forward in Government policy.

So will Dead for Lease, renting your own home be a viable option for struggling homeowners?

It is certainly an interesting idea. On one level it could be seen as a win-win option for pretty much everybody, at least in certain circumstances.

Win-win, because struggling homeowners get a chance to stay in their home when it has been settled that they can’t afford their mortgage but can afford the market rent of their home. It would also be good news for the neighborhoods struggling homeowners live in as it would avoid the drop in house prices foreclosed ridden neighborhoods are characterized by.

Even lenders may find this option appealing as an alternative to selling properties at cut rate prices. Lenders could turn landlords for as long as the market takes to turn around when they could sell the properties.

However few are predicting an avalanche of copy cat programs following Fannie Mae’s Deed for Lease program. Why? Two main reasons stand out.

1) Legal liability. Once a bank turns landlord he acquires responsibilities towards his tenants, the previous homeowners. The tenants could demand work being carried out on their home if there are cases of mold, Chinese drywall or other hazards in the home.

2) Banks are lenders not landlords. Most business like to stick to what they do best and not get into others types of business. As Chase spokesman Tom Kelly is reported to have said: “We’re not really equipped to be landlords”. Lenders in the U.S are sitting on nearly half a million repossessed homes. The operation required to manage leases on such a volume of homes does not seem attractive to many lenders at this moment. Most prefer to dump the properties on the market even if it is a buyer’s market and prices are very low.

Fannie Mae has subcontracted landlord management duties to another country but it is doubtful other companies will follow suit.

3) Leasing properties is often not as profitable as selling, especially when your business is not geared to managing a rental operation.

These reasons would indicate that Deed for Lease will not be a big deal in the mortgage market, at least for now. However there is no reason it won’t take off later on. There are many examples of housing policies starting small with federal housing agencies (like Fannie Mae) and then exploding to take nation and industry wide importance. A good example of this are loan modifications.

Many economists predict that loan modifications will not stop the avalanche of foreclosures caused by an ever increasing rate of unemployment and a nationwide drop in home prices. This might provide a chance for more attention to the idea of renting homes back to previous owners if the market is so saturated selling is no longer a viable option.