Would you Rent Your Own Home from Uncle Sam?
Friday, March 27, 2009 | Ethan RobertsRating:
Last week, Freddie Mac (under the control of the U.S. government since last September), launched a new program called the REO Rental Initiative, which permits at-risk home owners who are facing foreclosure to remain in their homes as renters. Freddie Mac will be offering these owners month-to-month leases. The rents will be based on current local market rates, and the homes must meet local property codes, meaning they have to be clean, habitable, and safe. They must also be free of all environmental hazards. The details, as put forth on Freddie Mac's web site are as follows. Qualified occupants must:
Demonstrate the ability to pay the market rent
Allow an inspector to enter and inspect the property
Sign a separate lease agreement
Sign a property condition disclosure at the time of the inspection
Allow future showings of the property to prospective buyers and real estate agents
The details will be handled by Freddie Mac's Home Steps real estate unit. The one criterion that caught my attention was that foreclosed owners who choose to remain in the home must allow prospective buyers and their real estate agents to view the property.
I can just imagine how that will go!
As a Realtor, on many occasions it has been my misfortune to show homes for sale in which tenants are still occupying the home. Every so often the tenants will be warm and friendly, and the home will be in good showing condition. Usually those are tenants who have already gone to contract to buy or rent another home, and do not care if their landlord sells the home in which they have been living. But far more often, when the landlord sells, the tenants are getting booted out, so they have an axe to grind in doing everything they can to prevent the home from being sold.
Freddie Mac tenant grinds his axe before the showing of his home...
So the prospective buyers and myself are usually greeted at the door with a grunt or a sneer. Every light in the house is turned off. The home is a mess, with dirty dishes in the sinks, laundry on the bathroom floors, toys strewn about, etc. Whether it's true or not, the tenant is pleased to relate to anyone who will listen that the home has bugs, plumbing malfunctions, and roof leaks. So what does Freddie Mac expect will happen when a home owner-tenant is asked to show the property for a sale that will put them out of their own home? Good luck with that one!
But here's my favorite part of the program, and it's similar to what banks have done in the past in California to try to preserve the property from being vandalized by angry, revenge seeking, defaulting owners. I'll let the web site speak for itself:
"Under the terms of a 'cash for keys' agreement, occupants will receive a cash payment if they vacate the home by the date specified in the agreement and leave the home in "broom-cleaned" condition, free of personal belongings and debris."
Here we go again, paying people to not commit a crime!
Unfortunately, Freddie Mac does not state on the site how much the cash payment will be, so I thought perhaps I would offer the following itemized menu as a suggestion:
| TASK | PAYMENT |
| Vacate on time and broom clean the house | $500 |
| Take out all personal belongings | $750 |
| Not stealing appliances, fixtures, or vandalizing | $1000 |
| Clean the kitchen and bathrooms | $1500 |
| Mow the lawn and trim the bushes | $2000 |
| Repaint neutral any orange or purple rooms | $3000 |
| Turn off all the lights on your way out | $5000 |
| Lock the doors behind you when you leave | $10,000 |
Do you think that's being generous enough?
If they follow all these steps, maybe the foreclosed owner will even have enough for a down payment to buy back the house! (Just kidding, their credit scores would be too low to qualify.)
I also have to wonder how the relationship between owners who choose to stay on as tenants and the Freddie Mac property managers will develop over time. You know, there is often a natural bit of tension between many landlords and tenants. Perhaps it has to do with the hierarchical nature of the landlord-tenant relationship. Here is how many tenants see their landlords:
And this is how many landlords view their tenants:
From 14 years of experience as a landlord, I can tell you that neither of the above images is really the norm. Yet changing the common perceptions can be tricky. How will the former owner/now tenant feel about following all the rules that will no doubt be created as to what they can or can not do with the home? A typical lease may prohibit certain items, such as above ground pools, trampolines, water beds, or other potential sources of liability. Will the government dictate whether the owner/tenant can hang wallpaper or paint the walls in unique colors? Freddie Mac also states on the site that additional pets may NOT be added to the new lease agreement. These rules may not sit well with families that previously had the ability to take advantage of the freedom that home ownership begets.
So what happens then? The owner's initial relief at being able to stay in their home could well give way to a new resentment at having the government dictate to them what they can or can not do there. How they treat the home that is no longer theirs, and whether or not they pay their rent on time, will be interesting to see. Freddie Mac states that there are requirements one must meet in order to prove adequate income to pay the pre-determined monthly rental amount. You know what the requirement is?
1) "Sample documentation would be your last paycheck."
2) "You are able to pay the first month's rent, due upon signing"
So if someone's last paycheck happened to be above or below their usual amount, that could well skew their ability to pay the pre-determined rent. So Freddie Mac will not do any further investigation than that? When was the last time you heard about any government agency doing a great job? Somehow I don't think the REO Rental Initiative will be much different. Count on them to find a way to screw things up.
I hope I'm wrong.
So my question for Tycoon readers this week is:
"If you were about to lose your home to foreclosure, would YOU be willing to rent your own home back from the United States Government?"
In other real estate related news, sales of previously owned U.S. homes rose 5.1% in February, the largest one month gain since July, 2003. However, about 45% of these sales were either foreclosures or short-sales. Lower prices of distressed sales, along with low interest rates and the $8,000 tax credit, are spurring pent up interest from new buyers to test the market.
On the other hand, the inventory of existing homes for sale also rose more than 5% from January. The foreclosure sales are good for eliminating the glut of distressed homes out there, but we are still at a national 9.7 month supply of inventory, which is about double where it needs to be. There is also concern that an increase in new listings may develop, as the publicity of the increased sales, plus the first signs of spring, stimulate sellers who have held back to try their luck again.
Signs of spring: Crocus flowers emerge and homes are for sale...
While the buyers are coming in droves to scarf up the foreclosures, tighter mortgage requirements continue to keep a lid on the number of potential buyers. VA and FHA minimum FICO scores have already been raised from 580 to 620, and now several lenders are raising the minimums on Conventional loans up from 620 to 680 or higher. All across America, people who were once irresponsible with their money and or credit are learning the hard way that when it comes to real estate, financial irresponsibility will no longer be rewarded.
Well, unless of course, you are being foreclosed on by Freddie Mac!
Well, unless of course, you are being foreclosed on by Freddie Mac!
Love to see that government money just keep on flowing...
See you next week!
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Ethan Roberts
Contributing Editor
The Tycoon Report
