Renting Returns to Favor, Thanks to Fannie/Freddie Deed-Leasebacks

It looks as if George Bush’s ownership society – during which a record 69.2% of American households owned their homes – is gradually coming to an end. To be sure, the Obama administration is many ways continuing the Bush policy of encouraging home ownership, via housing tax credits, loan modification incentives, and purchases (via the Fed) of mortgage-backed securities. At the same time, however, there is a growing recognition that universal home ownership is neither practical nor desirable; the alternative, of course, is renting.

By most measures, there has never been a better time to rent. While housing prices and interest rates remain favorable, rental costs are even more attractive, with ratios in many regional housing markets continuing to favor renting. Even in New York City, long perceived to be the nation’s most robust rental markets, is experiencing falling rents. Fundamentals (i.e. oversupply) are combining with rude economics (increasing unemployment, falling wages) to create one of the most attractive environments for renters in recent memory.

Many advocates argue that the government should ride this wave by formally ending at least some of its home ownership subsidies, such as the mortgage interest tax credit, FHA insurance, and guarantees for mortgage securities. Unfortunately, the vested interests which benefit from this system are enormous, and will not sit by idly as home ownership gives way to renting. From lenders to brokers, realtors to investment banks, there are literally trillions of Dollars at stake which are preventing a change in the status quo.

Renters did manage to score a token victory when it was announced last week that Fannie Fae had already initiated a pilot program that would enable to homeowners to remain in their homes for up to a year after foreclosure. This mirrors a similar move by Freddie Mac last March, and is in the same vein as an existing Fannie program which honors existing lease arrangement in rental properties facing foreclosure. Under the new program, the deed reverts back to Fannie after foreclosure, but the homeowner is given the option to rent the former home at market rate, which is typically well below the payment required under the preexisting mortgage. By most accounts, the program has proved to be a success, with a conversion rate of approximately 66% (i.e. 2/3 of homeowners opt for the deed-leaseback instead of eviction).

Of course, this initiative is not really grounded in any kind of altruistic desire to minimize foreclosure, nor does it aim to shift the balance back towards renting. Rather, it’s a simple business decision. Fannie realized that by delaying foreclosure in the practical sense, it could avoid dumping these properties on a market that is already saturated with foreclosed properties and taking a massive write-down from a short-sale. Instead, it can sit on the properties for a year while the housing market (hopefully?) recovers, while collecting a modicum of income from the homeowners-turned-renters.

Cynicism aside, renters should be happy for any break that they can get. With special interests and government incentives continuing to favor home ownership, renters are still fighting an uphill battle.