Fannie Mae and Freddie Mac to Become Landlords

Evictions by Fannie Mae and Freddie Mac have been put on hold through February 2009.

Both Fannie Mae and Freddie Mac have announced this month that they will go into the rental business, allowing both current renters and foreclosed homeowners to remain in their homes as renters on a month-to-month basis. Evictions have apparently been suspended through the end of February for Fannie Mae and Freddie Mac owned homes.

What does this mean to Santa Clarita residents? It’s hard to say… Theoretically, having someone living in a property, no matter how messy they are, helps to keep the vandals away. However, if you’ve been in any foreclosure or pre-foreclosure homes lately, you’ll know that some of these homes are in pretty sad shape, which makes them harder to sell.

It’s unclear whether the current renters will be allowed to stay through the end of their original lease term, or if they will go month-to-month in the same manner as the foreclosed homeowners. If the lease remains in place and is passed on to the new owner, then the home would need to be sold as an investment property, and at a price that would be covered by the current rent payment in order to be attractive to investors. This would mean that a current rental property would remain a rental property, instead of opening the market up to homebuyers who would otherwise be interested in that home. And it would also mean that property values would decline in certain neighborhoods, since an investor will never pay at or near market value for a home.

Many Realtors aren’t happy with this change in policy, since they would by default become the landlords for these rent-back properties. T&T (Tenants and Toilets) is not something that most Realtors specialize in,  and not all tenants are cooperative when it comes to showing homes to potential buyers. I showed a rental property recently where Mrs. Tenant made sure the house was a disaster, and even set off the smoke alarms by heating (burning) a pan of oil while we were there. And these were tenants who apparently hadn’t paid rent for months, so eviction was likely imminent anyways.

Jason Allnutt, Fannie’s vice president for credit-loss management, says, “If we get a good renter and set the rental rate at a good market rate, then it really should be attractive to an investor.” Well, that may work in markets where the mortgage payment is closer to market-rate rental prices, but in California that’s not likely to happen.

Since investors are not likely to purchase homes that will produce negative cash flow each month, it’s hard to say whether this rent-back policy will be effective in the Santa Clarita area or not. For example, a $400,000 home purchased as an investment property at 5.5% with 10% down would require payments of $2,044/month plus property tax and insurance of about $450/month (assuming no Mello Roos). That means that an investor would need at least $2,500/month in rental payments to just break even, and that’s before T&T and landscape maintenance. Sure, rental rates are relatively high in the Santa Clarita area, but not high enough to support the investor’s break-even unless the investor has a large enough down payment to significantly reduce the monthly mortgage payments. Still, this doesn’t make sense to most investors, since they want to use as little of their own cash as possible as down payments so they can continue to invest in more properties.

It’s also unclear whether all evictions will be put on hold, or just forcible evictions. Typically, the foreclosing bank will offer the tenants or foreclosed owners a “Cash for Keys” (CFK) payment of about $400-$2,000 and allow them 30 days or so to move out voluntarily. According to Amy Marx, staff attorney at New Haven Legal Assistance in Connecticut, says that “the only thing Freddie Mac has agreed to do is not send the sheriff to forcibly remove tenants”. Does this mean that Fannie Mae and Freddie Mac will still offer CFK payments? Nobody seems to know for sure.

Tenant advocates are calling on all private lenders to follow Fannie Mae and Freddie Mac’s lead by leaving current tenants in place after foreclosure, as long as they have held to all of the terms of their current rental agreements. Tenants who have are either late on their payments or who have damaged their homes would not necessarily fall under the new provisions allowing renters to remain, since they have already violated their current rental agreements.

It is estimated that Freddie Mac currently has about 8,500 homes in the foreclosure process, and most of those are vacant. Fannie Mae says it stopped about 20,000 foreclosure sales and halted (or delayed) about 6,300 evictions this winter nationwide.