Details of Fannie Mae’s “Deed-for-Lease” program were released yesterday, allowing homeowners facing foreclosure to sell their house back to Fannie Mae and begin renting the same property at a reduced rate. Property owners will transfer their deed to Fannie Mae in lieu of foreclosure, then lease it back at a “market rate” for 12 months. The program is eligible for borrowers who are up to 12 months past due on their mortgage payments. I understand that this is a program to help avoid continued foreclosures, but does the government (Fannie Mae was placed under conservatorship in September 2008) really need to purchase more property from delinquent homeowners? Is this the most efficient means of using taxpayer capital? Reducing the borrower's principal balance owed is a better method so the government isn’t left with the house when they realize that the owners turned renters are still delinquent on their payments in a few months. This program actually gives an incentive to homeowners who are current to stop making loan payments and apply for the program so they can reduce their monthly burden without any further disruption. Fannie posted an $18.9 billion loss in the third quarter and the government will soon inject more capital into the failed company, bringing the taxpayer’s tab to over $61 billion. On a positive note, this program may spread out the timing for when foreclosed properties are hitting the market, easing pressure on home prices, but it probably won’t be big enough to have much of an impact. It’s yet another whammy for taxpayers and bond investors. Agency mortgage bond holders will see a spike in prepayment levels, further reducing interest earned from holding Fannie paper. It will be interesting to see how Fannie plans to monetize the new REO (real-estate owned) as they are signing 12 month leases with the residents, making the asset completely illiquid. There has never been a good secondary market for leases, let alone those composed of formerly-delinquent homeowners. My prediction is that this will not help avoid foreclosures as anticipated and will end up costing the government and taxpayers well more than the $15 billion asked for today.