Monday, Feb. 2
Posted 4 p.m. Eastern
Fannie and Freddie the landlords
Both Fannie Mae and Freddie Mac have announced plans to stop evictions of tenants living in foreclosed homes. However, there have also been reports that they will also extend the option of renting to the very homeowners that have been foreclosed upon. Following is my take on each scenario, and I invite you to respond with yours.
Let's start with the policy of no longer evicting a tenant whose only mistake was renting from a landlord that didn't pay the bills. I say this is good and long overdue. For far too long, people that make their monthly rent payments on time have found out too late that the landlord was behind on the mortgage, fell into foreclosure, and upon the bank taking over, they were promptly told to scram. Let me be clear: This is a welcome change of policy provided the tenant pays the rent on time. If the tenant doesn't pay the rent on time -- or at all -- that is a likely contributor to the landlord's distress, and they should not be allowed to stay.
According to an article that appeared Saturday in The Wall Street Journal, real estate agents object, with the reasons cited being that the plan would hold back a recovery in housing, that it will take longer to sell the homes and, in part, because real estate agents will reportedly be handling the collection of rent as well as maintenance for some Fannie Mae properties. I could see why they're not wild about collecting rent and handling maintenance.
But having a prompt-paying tenant in place would be plenty attractive to many investors looking to buy foreclosed properties. In the same WSJ article, one passage reads: "Real estate agents also say they are worried the policy will limit the pool of buyers to investors, and that it could lead rental prices to dictate sale prices and further erode values."
There are two valid points made in that sentence. I'll address each. Yes, it would limit the pool for those homes to investors, but with all the inventory of homes on the market, it will take both homebuyers and investors to soak it up. Homebuyers (as in, people that will live there) won't do it alone.
The second point makes a nice segue into why I think renting foreclosed homes to the homeowners that were foreclosed upon is a bad idea. In that case, if the homeowner couldn't afford to keep up with the costs of homeownership, there is a fair chance they won't be able to keep up with the cost of renting the home either. That's not a stretch. The only way to assure they'd be able to afford renting the home -- when they clearly couldn't afford to own it -- is if they were given some sweetheart deal on the rent. And its those sweetheart rent deals that don't fly -- not in order to allow the former owner to stay in the home and not as a basis for pricing the home for eventual sale to an investor.
One final point: the catalyst for foreclosures in 2009 will decidedly tip toward job losses instead of the mortgage rate resets and exotic loans that have been leading catalysts up until now. This calls for a different approach. For homeowners that were current with their mortgages up until the time of job loss, a prudent mortgage modification strategy is to suspend payments until the homeowner returns to work. After all, they've demonstrated a commitment to make timely payments as long as they have steady income. This homeowner deserves the benefit of the doubt and the opportunity to get back on their feet. Once they are re-employed, the lender/loan servicer can evaluate based on the homeowner's new level of income (which is often lower) whether a further restructuring of the terms is necessary and viable or if they are able to resume making monthly payments under the original terms of the loan.
There are sure to be issues with those loans that are part of mortgage-backed securities and how the servicer can okay a suspension of payments on behalf of thousands of investors. But the net present value (that is, the current value of all future payments to be received) is a heckuva lot higher on a property where the owner has demonstrated timely payments as long as they have a job than on a property where timely payments were only possible at very low teaser rates, or in an interest-only or minimum payment capacity. Those are loans that won't be cured and the push to modify and restructure those loans does nothing but kick the can further down the road by keeping someone in a home they cannot truly afford.
The best long-term solution for our housing market and broader economy is to make sure that homeowners can sustainably afford the payments for the home in which they live. If they cannot, it is best that they find another less-expensive place to call home.
There have been too many shortcuts for too long and we're now paying the price. Let's take our medicine, no matter how uncomfortable or how long a recession it entails, and make sure that the mess gets cleaned up once and for all, rather than just deferred for a possibly more prolonged or severe adjustment later.
Again, I welcome your comments and will post some in an upcoming blog entry.