On November 5, 2009, Fannie Mae announced a program that could furnish a temporary break to homeowners who can’t pay their mortgages. As designed the program would allow homeowners the option of transferring their title to Fannie Mae and renting back their homes at a market rate for a year, on a month-to-month basis.
Cited as advantages: the lender needn’t engage in the exacting, expensive and time-consuming foreclosure process, families stay in their homes without any uncertainty and with less vandalism and fewer overgrown yards, neighborhoods are more stable, and less damage is caused to borrower’s credit history. It appears that the program is designed to help homeowners in arrears who don’t qualify to modify their loans, but who want to stay in their homes. Critics worry that this newest offering will further destabilize the mortgage giant which has spiraling losses to cope with already even after billions of dollars of public support. Like a hidden sort of inventory, qualifying homes, they argue, will eventually have to be dumped back on the market, only postponing what Fannie Mae should have done originally, and prolonging recovery.
National publications have singled out Phoenix as a place where the program should be particularly attractive because of the exaggerated decline of our real estate market. A management company runs the Deed for Lease program and rates are based on the market. Homeowners have to prove they can afford these rents, and must live there as a primary residence. Freddie Mac launched a program in March that required that foreclosures be completed and supplied only month-to-month loans — there is no public data that describes how many people participated in that similar program, fueling the suspicion that it was a small percentage.
John Back, a CPA and partner at J.J. Swart & Co./Valley Accounting, who specializes in real estate transactions and their implications, tends to agree with critics of the plan, who feel that participating homeowners are simply postponing the inevitable. Says Back:
The Fannie Mae Deed for Lease Program has some merit in that it allows homeowners to stay in their homes as market-rate renters for up to one year after losing ownership of the homes. The merits of the program are curious to me because while the program does allow the homeowner to avoid the disruption of moving right away and it reduces their monthly payment down to a market rent amount; it is only putting off the inevitable move to more affordable living arrangements. I would think the more logical way to handle this is to simply consider this a loan modification and let the homeowner continue to occupy and own their home on more affordable terms.
As with any such decisions, the homeowner is well-advised to consider other implications. These are critically important decisions. For example, Mr. Back comments on taxes:
The tax implications are simple on their surface. Basically, the homeowner loses itemized deductions for mortgage interest and property taxes, on the other hand they are paying a lot less because they are renting at market rates rather than paying a mortgage. So cash flow is the key determinant here, not tax savings.
Foreclosure becomes very complicated. Under President Obama’s Mortgage Debt Relief Act non-recourse gains on debt foregiveness are not taxable up to $2 million for a married couple who are occupants of the home. Investment properties do not get any benefit. However, with proper planning, investment properties can create tax benefits instead of tax liabilities.
There are a forest of tools out there at one’s disposal; it is important to not simply focus on the trees. With loan modifications, short sales, foreclosures, deeds-in-lieu and many other combinations now supplemented by the programs of Freddie Mac and Fannie Mae, it is fitting to consider the advice Back gives his clients: “gather all of their loan documents and have your lawyer and your CPA evaluate insolvency, recourse debt provisions, gain or loss on the transaction for investment properties and tax planning before they enter into any transaction with the lender. It is often one of the biggest financial decisions, with the biggest income tax consequences, that anyone will ever face.”
By Frank L. Murray
STOOPS, DENIOUS, WILSON & MURRAY, P.L.C.
Frank Murray has been practicing law in Arizona for over thirty years and he continues to practice in the field of commercial litigation and fraud-related theory at the law office of Stoops, Denious, Wilson & Murray. He can be reached at (602) 263-8861.
Jay Ryan, Jr., Vice President, Fannie Mae, 11/5/09 statement.
See, Huffington Post, November 24, 2009.