The nation's largest two mortgage companies are giving distressed mortgage borrowers a little more time to stay in their homes.

In the late-80s, a children's television comedy series called Out of This World featured a main character who could freeze time. It's an enviable skill, one that would be particularly appealing to homeowners who are skidding towards foreclosure. Fortunately, with respect to mortgages, there's a next best thing-time can't be frozen, but foreclosures can.

No evictions 'til March

Nationalized mortgage giants Fannie Mae and Freddie Mac have once again extended the foreclosure moratorium. The move pushes out the foreclosure freeze deadline to February 28. The mortgage companies are still proceeding on early-stage foreclosures, but they're stopping short of locking people out of their homes. A temporary foreclosure prevention measure, the foreclosure moratorium has been in effect since November 26 of last year.

Fannie and Freddie, under government control since last September, own or guarantee roughly half of all U.S. mortgage loans. Given that breadth, the two companies have been heavily pressured to develop and initiate programs to lead the country out of this mortgage crisis.

New landlords in town

At some point, the foreclosure moratorium will be lifted. When that happens, Fannie Mae and Freddie Mac will have a list of evictions to process and foreclosed homes to seize.

Both companies have announced a new rental program that will hopefully ease that transition. The program allows foreclosed homeowners to stay in the home under month-to-month lease agreements. The ex-mortgage borrowers would pay market rents, but would not be responsible for the home's maintenance costs.

Although the rental program doesn't pursue the goal of foreclosure prevention, it does offer some advantages. It will minimize the household disruption associated with foreclosure, while keeping the homes occupied. The latter is important because empty homes often fall into disrepair and become targets for vandalism; this impacts the quality of life in the neighborhood and puts downward pressure on housing values. Both factors have contributed to the record decline in housing prices over the last two years.

Fannie Mae and Freddie Mac will also benefit by generating income off these properties until they can be sold.

Foreclosure prevention kudos

The Center for Economic and Policy Research (CEPR), an independent and nonpartisan group, supports the decision to implement the rental policy. Co-Director Dean Baker believes Fannie and Freddie could improve on the program by offering five- or 10-year leases on those properties. In a press release, he indicated that a longer-term program would provide a strong incentive for lenders to renegotiate mortgage terms so that those loans don't fall into foreclosure.

Fannie Mae and Freddie Mac don't have Out of This World powers at their disposal, but they do have access to a very large number of distressed homeowners. That puts the onus on them to implement foreclosure prevention and housing recovery programs that will make a difference going forward.

Published on April 4, 2008