24/7 Wall St. TV: Homeowners Faced With Foreclosure Can Rent Their Own Homes

The government’s many programs to keep the number of mortgage defaults from growing has grown by one. The new Dead for Lease program will allow some homeowners who face foreclosure to turn their homes over to Fannie Mae (NYSE:FNM) then rent them for a year with month-to-month extensions. It is not predictable what the level of fraud in a program of this kind will be, but it is likely to be high. Fannie Mae could end up with a number of houses with no tenants or sub-tenants which have been surreptitiously been moved in

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The program “helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities,” Jay Ryan, a Fannie Mae vice president, said in a statement.

The government remains on its track to save the housing market by keeping people who cannot afford in their homes. That presents several risks. The first is that many homeowners who have gotten new financing end up defaulting anyway. This behavior is probably driven by both unemployment and the realization that homeowners have that their houses will never be worth more than the mortgages on them. The homeowner is already essentially a “renter” when his home is underwater. He is simply paying his rent to his bank.

One of the effect of putting artificial support under the housing market either through refinancing or a rent to own program is that the price of homes will take longer to bottom than it would if the free market was able to operate. Housing prices would probably drop violently without government support, but that would bring them to a level that would almost certainly stimulate renewed buying activity.

The alternative to not allowing housing prices to find their own level is to create a nation of renters in which banks and the government own many of the homes.

Douglas A. McIntyre

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Executive Producer: Philip MacDonald