Fannie Mae Halting Evictions On Renters In Foreclosed Homes

This story isn’t likely to get much attention but I still find it quite interesting, Fannie Mae (FNM) is implementing a new policy where it will halt eviction proceedings for renters in foreclosed homes. The idea is that it imposes a hardship on the renters, and since these homes are likely to empty anyway it’s just better for the community overall:

(From the WSJ): “Fannie Mae is finalizing a national policy that will allow tenants to remain in their homes even if their landlord goes into foreclosure — a landmark decision for tenants.

The policy will be in effect Jan. 9, Fannie Mae said Sunday, and reflects growing pressure on the mortgage company from a legal-aid group that threatened to sue over recent evictions. The company said it will also ensure its current holiday moratorium on new evictions is being followed until the new policy takes effect.

“We’re delighted that Fannie Mae has agreed to change their policy,” said Amy Marx, an attorney with New Haven Legal Assistance in Connecticut. “And we’re hopeful others will follow suit.”

In late November Fannie Mae and Freddie Mac (FRE) said they would suspend tenant evictions temporarily during the year-end holidays. New Haven Legal Assistance said that despite the pledge, Fannie Mae was proceeding with more than a dozen new eviction cases in Connecticut. The advocacy group said the evictions would violate legislation passed earlier this year to rescue the two mortgage-finance giants that required them “to permit bona fide tenants who are current on their rent to remain in their homes under the terms of their lease.”

In his letter Sunday to the New Haven group, Fannie Mae General Counsel Curtis Lu wrote: “As far as we know, this will be the first nationwide program of its kind.” Copies of the letter were sent to Christopher Dodd (D., Conn.), chairman of the Senate Banking committee and Barney Frank (D., Mass.), House Financial Services Committee chairman.

Freddie Mac hasn’t announced a similar policy reversal, though a spokesperson said they are “currently evaluating additional actions.”

The decision by the government-backed mortgage giants represents just a slice of the market and excludes many properties purchased with riskier loans that are now falling into foreclosure. Fannie Mae and Freddie Mac, however, are uniquely structured to be able to address the issue, which effectively now has them acting as a type of landlord or property-management company to administer month-to-month leases to renters of their foreclosed properties.”

To be sure my initial response to this policy was mixed at best, primarily due to the fact that the mere existence of a renter in a property shouldn’t mean that the mortgage holder’s rights to sell the property in order to recoup their losses should be suspended. Especially since many mortgage holders would have to effectively form property management divisions in order to manage something like this. Not to mention the fact that this is a temporary solution at best.

Still that was my gut reaction.

At the end of the day when you consider all the facets of the overall foreclosure problem, this is a good short-term (possibly medium-term) solution that will at least keep “some” revenue flowing into the GSEs from these bad loans/foreclosed properties, and provide the tenants with the opportunity to make alternative housing arrangements. Furthermore when you consider the fact that renters are taxpayers too and the GSEs have been effectively nationalized, it makes perfect sense for the GSEs to go out of their way to help taxpayers who are just innocent bystanders in the overall process.

It also brings to mind another idea for the growing number of people who have been displaced by foreclosures (be they owners or renters), as some of the properties that are just gathering dust on the books of banks could be rented out to people on a 1-2 year basis. Furthermore they could conceivably be sold (down the road) to investors who are in the business of managing rental properties. Either way these homes are going to be more appealing to any potential buyers or investors if come with paying tenants, because even if you don’t want the revenue stream the house is likely to be in much better shape.

In any event while suspending the rights of owners isn’t the best thing on a long-term basis, it’s an appetizing short to medium-term solution. I just think that we have to be careful overall, because canceling aspects of property ownership to mitigate short-term problems can be a slippery slope to be sure.

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