The Federal Reserve weighed in this week on REO-rental programs, giving tempered support and re-emphasizing rules in place for banks to deal with massive inventories of foreclosures.
The Fed, which regulates the U.S. banking industry and the money supply, said in an April 5 statement that banks must make good-faith efforts to liquidate lender-owned properties. But in areas such as the Inland Empire, among the hardest-hit by foreclosures, banks may choose to turn REOs into rentals until they can sell the homes.
“These distressed sales represent a significant proportion of all home sales transactions … and are a contributing element to the downward pressure on home prices,” the Fed stated in its written opinion. “With mortgage delinquency rates remaining stubbornly high, the continued inflow of new real estate-owned properties to the market – expected to be millions more over the coming years – will continue to weigh on house prices for some time.”
The Fed chimed in as some banks and GSEs have announced plans to convert REOs to rental homes in an attempt to stabilize the real estate market and protect vacant homes from squatters, theft and vandalism.
Reiterating guidelines already in place, the Fed said lenders must:
- Comply with all local, state and federal landlord-tenant and fair-housing laws.
- Have systems in place to manage, track and oversee each property.
- Develop strategies with the ultimate goal of selling the property within the applicable holding period (generally, five years with one five-year extension in certain circumstances). Exit strategies can include seller-assisted financing or rent-to-own arrangements with tenants.
NEW LEASE-BACK PROGRAM
Along with REO-rental programs, non-profit organizations and some lenders also are considering new programs to deal with millions of bank-owned homes and to stem the tide of foreclosures for borrowers on the brink of losing their homes.
Fannie Mae in February put its first block of 2,490 REOs up for bulk sale to investors to convert to rental properties. Nearly one-fourth are in Los Angeles, and the remaining homes are in Atlanta, Chicago, Las Vegas, Phoenix and Florida, the hardest-hit areas in the country.
And in March, the Short Sale Lease-Back Buy-Back Program, another pilot designed to stabilize neighborhoods and help homeowners avoid foreclosure, launched in California.
For homeowners who qualify, the Home Affordable Foreclosure Alternatives program now allows a homeowner to short sale a home to a non-profit organization, rent it back for three years and then buy it back at a pre-determined price.
Until recently, the HAFA program required that a short sale be an “arm’s-length” transaction, meaning the buyer and seller could not be related and could not have a prior agreement for the homeowner to stay in the property.
A March 2011 supplement to the HAFA guidelines “amends this restriction to allow servicers the discretion to approve sales to non-profit organizations with the stated purpose that the property will be rented or resold to the borrower, so long as all other HAFA program requirements are met.”
Not all homeowners qualify for the program. Borrowers must have sufficient income to afford the monthly rent payments in addition to their other debt payments. For those who do qualify, the impact could be similar to a slow-motion loan modification with a principal reduction to their loan amount.
Homeowners who don’t qualify for this program can still proceed with a traditional short sale, which may include a relocation incentive from $3,000 to as high as $45,000, depending on their lender, loan amount and individual situation.
Either option is better than a financially devastating foreclosure, which can crush a consumer’s credit, hinder their ability to find a home to rent and perhaps even impact their jobs.
Want to know if you qualify for the Short Sale Lease-Back Buy-Back Program? Call 951-778-9700 today to make an appointment for an interview.
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