How Struggling Homeowners Can Stay in Their Homes as Renters

With foreclosures continuing to mount, housing finance giant Fannie Mae has introduced a fresh approach to keeping struggling borrowers in their homes: turning them into tenants. Fannie Mae—which, along with Freddie Mac, owns or guarantees nearly $5.5 trillion in mortgages—announced last week its Deed for Lease initiative, in which property owners facing foreclosure can remain in their homes as renters. Under the program, a borrower who qualifies can transfer the deed for a home over to the lender and lease the home back for up to 12 months. "The Deed for Lease Program provides an additional option for qualifying homeowners who are facing foreclosure and are not eligible for [loan] modifications," Jay Ryan, vice president of Fannie Mae, said in a statement. "This new 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."

Here are five things you need to know about the program:

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1. Soften the blow: The program is designed to soften the blow that foreclosures can have on families and neighborhoods by giving borrowers time to plot their next step, says Keith Gumbinger of HSH.com. Only borrowers with loans owned or guaranteed by Fannie Mae can participate. (Borrowers can use this tool to find out if Fannie Mae owns their loan.) Interested borrowers with loans owned by Fannie Mae should call their loan servicer, who will contact a property manager to determine eligibility.

2. Property eligibility: In order to qualify for the program, the property must not be subject to zoning or other regulations that would prevent a deed-for-lease swap. In addition, the property can't be in violation of local laws or rules, and the costs for any needed repairs must not be too high. Only homes used as primary residences are eligible. Finally, the rental income must be enough to pay for management and maintenance costs.

3. Borrower eligibility: Borrowers-turned-renters must have a verifiable income to qualify for the program. In addition, the market rent can't exceed 31 percent of their gross monthly income. The borrower has to agree to keep the property in good shape, and there can't be any evidence that illegal activities are taking place there. And in some instances, borrowers who have pets may be required to obtain renter's insurance.

4. Extraordinary times: Gumbinger says the program reflects the extreme nature of the housing crisis.

"Extraordinary times call for extraordinary measures," he says. "I can't imagine in their wildest dreams that Fannie and Freddie wanted to be landlords." The Deed for Lease initiative, however, may allow Fannie to limit its losses by generating some rental income and enabling the company to postpone the sale of foreclosed properties for up to 12 months. And it's possible—although certainly not guaranteed—that the real estate market will be stronger by then.

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5. Private sector to follow? Gumbinger says that by launching this initiative, Fannie—which is now under government control—may be hoping that similar deed-for-lease programs will be established by private firms. "The hope is that private entities are going to look at this and say, 'Here is a model that Fannie is employing, we may be able to employ it as well,' " he says.