Housing News

Will Renting Foreclosed Properties Work?

Freddie Mac’s new plan aims to reduce foreclosures, at least so far.

Homeowners and renters on the verge of losing their homes to foreclosure have found a consolation from Freddie Mac. The government sponsored enterprise is looking forward to enact a plan that would allow them to stay in their homes by renting them back. This aims to put a halt on the spiking foreclosure rates in the country that has risen by 87 percent last year. According to Stephanie Armour of USA TODAY, the details of the program include the following:

• Leases will be on a month-to-month basis.

• Tenants and homeowners will only have to pay market-value or existing lease rents, not the mortgage payments. Freddie Mac will hire a property management company to determine that amount.

• Tenants and homeowners must be able to show proof that they have enough income to pay the monthly rental amount.

• Freddie Mac will also explore loan-modification options that might be available for some borrowers.

Will this plan get the battered real estate industry off the ground? In a way, it can do so partially. First, it can generate hundreds of jobs in property management. Second, it will help keep distressed properties off the market for awhile until homeowners restructure their finances. Third, instead of creating ghost towns from uninhabited properties, Freddie Mac can still earn additional revenues from the rents. It’s better to have something small that not to have anything at all. Lastly, banks detest unmaintained homes because once they’re appraised, they’ll have lower values and in most cases, there’ll be harder to sell. (Read our related post on bargain foreclosed homes here .) This plan will preserve the current physical condition of each property.

Yet, there are disadvantages to Freddie Mac’s proposal. First, the transition from paying monthly mortgages to rents will take a longer time. Lenders will obviously delay processing the paperwork because they’ll see this no more as a priority. Second, some homeowners can opt not to be a part of the program. They can earn more by allowing somebody (a relative, perhaps) to move and require them to pay a higher rent instead. Therefore, they can continue paying their mortgages. Third, can homeowners still pay the rent when in fact they can’t sustain their mortgage payments in the first place? Remember, many homes that are sold today have payments lower than the existing lease rents.

To settle these arguments, the best solution is for Freddie Mac to allow homeowners to rent but ensure that they’ll be allowed to keep their houses through mortgage modification programs that can suit their current financial positions.

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