FNMA Announces New Policy For Renters In REO Properties

On January 13 Fannie Mae released an announcement describing a new policy that will allow qualified renters to remain in Fannie Mae-owned foreclosure properties. Formally known as the National Real Estate Owned Rental Policy, it is meant to address the difficulties faced by tenants who – often through no fault of their own – face serious disruptions in their lives because the owner of the property in which they live has been foreclosed upon.

Said Michael Williams, chief operating officer of Fannie Mae, “This policy will allow qualified renters to remain in Fannie Mae-owned properties should they choose to do so, mitigate the disruption of personal lives that foreclosures can cause, and help bring a measure of stability to communities impacted by high foreclosure rates.”

The policy applies to renters who occupy the property at the time of foreclosure or deed-in-lieu of foreclosure. It will not apply to the borrowers who are losing the property, nor to their immediate families. The type of property occupied may be single-family homes, condos, co-ops, manufactured housing, or one-to-four unit buildings. The only requirement is that the property is a Fannie Mae REO, and that it conforms to all applicable local and state requirements for a rental property.


Key features of the new policy are as follows:

After the foreclosure is complete, renters will be offered the opportunity to either accept an incentive payment to vacate the property (“Cash for Keys”) or they may sign a new month-to-month rental agreement with Fannie Mae.

Fannie Mae will not require payment histories or credit checks.

Renters will be charged market rents. This may require a local rent survey for comparison purposes. Fannie Mae will “review each instance where the market rate may require a tenant to pay additional rent and will work to reach an equitable solution.”

No security deposit will be required. On the other hand, the announcement is silent on Fannie Mae’s possible obligations if an unreturned security deposit had been paid to the foreclosed- upon former owner.

The property will be for sale, and may undergo repair or rehab work, during the term of the tenancy. “If the property sells, the lease will transfer to the new owner.”

The property will be managed by a real estate broker and/or a property management company.

Whether the new Fannie Mae policy will be a good thing is yet to be determined. Having lost many, many millions of dollars, Fannie Mae has already demonstrated that it was not particularly good at its core business. There is little reason to think that it will be good at the landlord business either. Even with property management companies, someone has to manage the property managers.

Already, one can see that the policy may not be particularly good for many tenants. Suppose you had begun a one-year lease in September, and now, in January, the property has been foreclosed upon. Fannie Mae offers you a month-to-month tenancy while the property is for sale. You still might have to move before school is out.

Nor does it look terribly attractive on the buyer side. A prospective owner-occupant doesn’t want a tenant in possession when he closes escrow. And neither he nor an investor buyer can be very positive about taking a property where the tenant occupant has paid no security deposit.

It’s a nice idea, but the new Fannie Mae policy is probably going to require some refinement.

January 2009