Now I have seen it all - Fannie to rent foreclosed homes - to the foreclosed homeowner - 2:15

From the Wall Street Journal Fannie Mae to Rent Foreclosed Homes Back to Borrowers By NICK TIMIRAOS Fannie Mae plans to allow homeowners facing foreclosure to stay in their homes and rent them for up to one year as part of the latest effort to help troubled borrowers while keeping a glut of foreclosed properties from hitting the housing market. The Deed for Lease Program, which Fannie plans to roll out on Thursday, will offer borrowers who fail to complete or don't qualify for a loan modification or other workout to deed their property to the lender in exchange for a lease. Borrowers-turned-tenants will be able to sign leases of up to 12 months and will pay market rents, which in most cases are lower than the cost of mortgage payments. Fannie Mae wouldn't say how many homeowners it expects will take advantage of the program. The company acquired 57,000 properties through foreclosure during the first half of the year, bringing its total real-estate owned inventory to 63,000 properties valued at $6 billion. The rental program will allow Fannie to hold inventory off of already saturated housing markets and makes a bet that the housing market will be stronger one year from now. "If you keep more people in their homes, it's better for the community. It's better for the financial institutions that own those homes," says Jay Ryan, vice president of equity investments at Fannie Mae. "Hopefully less foreclosure product on the market will help stabilize those communities." Borrowers who haven't missed any mortgage payments aren't eligible for the program, and the borrower's mortgage servicer would have to show that a borrower isn't eligible for a loan modification before the homeowner could apply for the Deed for Lease program. More Housing News * Developments: FHA Postpones Audit as Bailout Worries Mount * Housing: Tax Credit Would Keep Prices Up "I'm sure Fannie is hoping that when they sell the properties, the values will be higher," says David Berson, chief economist for PMI Group Inc., a private-mortgage insurer. "A year from now, we should be a year further into the economic recovery, and housing demand will be stronger…That will allow you to release homes that have been foreclosed upon but not put on the market." The program could also help Fannie preserve the value of its nonperforming assets because occupied homes are more likely to hold up better that vacant homes. The rental programs also provide some rental income to the government-backed mortgage finance giants. "If they can keep the property occupied and have at least some positive cash flow, that may end up being less worse than going the route of kicking them out and having a vacant home," says Thomas Lawler, an independent housing economist based in Leesburg, Va. The move by Fannie follows a program by Freddie Mac that began offering month-to-month leases to owner-occupants who had lost their homes to foreclosure. But Freddie continues to market those homes for sale. The Fannie Mae program differs in one important respect: foreclosed homes won't be listed for sale. In February, both companies began allowing tenants whose landlords had lost their properties to foreclosure to sign month-to-month leases. Borrowers will have to show that the monthly rent is less than 31% of their gross income. The program, which will use a professional management company to handle maintenance, will allow borrowers to renew their leases on a term or monthly basis and properties that are sold during the lease period will include an assignment of that lease to the new owner. So far, around two-thirds of owner-occupants who have been offered monthly leases by Freddie Mac have taken them, and the break down of owner-occupants to tenants who have rented under the program is roughly two-to-one. Freddie Mac says it is considering whether to extend longer-term leases to some troubled homeowners. "We're looking into our options because there are certain markets where there's just so much inventory on the market," said Ingrid Beckles, senior vice president of default asset management at Freddie Mac. In recent months, some industry analysts have been puzzled over why more homes haven't been put up for sale as the rate of borrowers who default climbs higher. Well-intentioned efforts to keep families in their homes have led to delays that some analysts believe is prolonging the mortgage crisis by creating a "shadow" inventory of pent-up supply that will ultimately hit the market. That has prompted some to question the logic of keeping homes off of the market at a time when demand for bank-owned properties has been soaring. The number of foreclosed properties for sale in Las Vegas, for example, has fallen to a less than three months' supply, according to SalesTraq, a local real-estate research firm. But housing demand typically falls in the winter, and the number of foreclosures continues to grow. "We're past the peak of when you would want to sell," says Mr. Lawler. Over the past year, the Obama administration has increasingly used Fannie Mae and Freddie Mac as the centerpiece of its housing-rescue policy, charging the mortgage-finance companies with spearheading a campaign to modify and refinance millions of troubled and at-risk homeowners. The rental programs join a series of other initiatives, including efforts to improve short sales, where a borrower sells the home for less than the value of the mortgage designed to help borrowers that may not qualify for those programs. Write to Nick Timiraos at nick.timiraos@wsj.com