Topic: "Deed for Lease" (Mortgages)

Written by Chris Titus, CFA

Language: English

Level: Intermediate+

Warm Up Questions:

• List some of the causes of the global economic crisis that began at the end of 2008.
• Is one country to blame for these problems?  If 'yes', why?
  
• Do people have responsibilities for their own financial affairs?
• Do you know how many countries became insolvent (went into bankruptcy)?

Author's Note: Many people believe the United States caused the global financial crisis.  However, this is not accurate.  A detailed look at many countries around the world paints a picture of greed by local bankers.  In the end, each country and its citizens are responsible for their own financial affairs and problems. For example, home owners and businesses in Hungary taking on debt in foreign currencies (borrowing in Euros when they earn income in Forint) was a recipe for disaster when foreign exchange rates moved against them.  Iceland's goal of becoming a world financial center led banks there to accept leverage far beyond what they could tolerate as a nation.  Now consider Canada.  Despite bordering the U.S., Canada has been relatively untouched by the problems faced in America.

Vocabulary and Definitions (difficult words related to video or article):

• mortgage - money borrowed for the purpose of purchasing a home or other types of real estate.
• interest rate - the cost of borrowed money (expressed as a percentage)  
  

Example:
   You borrow $100 and are required to repay $110.  
   The additional $10 represents the interest portion paid.  
   The interest rate is 10% ($10 / $100 = 10%)

• refinance - to borrow money from one bank to pay off a debt with another bank.
• home equity (loan) - Money borrowed against the equity ownership in the house.  
  

Example:
   Home value = $1 million.  
   Mortgage = remaining amount owed on the mortgage = $600,000.  
   Home Equity = Home value - mortgage (amount owed) = $400,000

• second mortgage - a mortgage on property that already has a mortgage.  The second mortgage has weaker legal rights.  
• deed - the document showing ownership of a specific piece of property

Article Excerpt

In response to the recent mortgage crisis, Fannie Mae has provided troubled homeowners with the option of exchanging the deed to their home for a one-year lease.  The program, called "Deed for Lease", represents the government's latest effort to protect borrowers who cannot make the payments on their mortgages.  "With the collapse in real estate values, most of these people have no equity in their homes and are unable to refinance them as a way to pull money out to survive these difficult times," according to Harold Smith a private real estate investor.  He believes the program is a win-win for participants and communities.  Participants will likely pay lower rents than the mortgage payments currently owed and stay in their homes.

Discussion Questions: (possible answers listed below)

• Describe what is meant by a troubled homeowner.
  - Someone who is in foreclosure or pre-foreclosure
  
• Describe the exchange Fannie Mae is offering in the article.
  - To exchange the deed for a lease, allowing bankrupt homeowners to remain in their homes
  
• The article stated, "keeping people in their homes is good for communities."  Is this a good deal? Why? And, can you think of other benefits not mentioned in the article? 
  - Yes it is a good deal.  It helps maintain home values and keeps communities from falling apart
  
• Do you think most program participants have some equity value in their home? Why?
  - No is the likely answer.  The values of homes have probably fallen too far.
  
• Why do people refinance their homes?
  - 'To pay a lower interest rate', which can lower their monthly payments significantly
  
• Do you know which direction interest rates have moved recently?  Why?
  - Interest rates have moved lower.  During economic recessions, governments lower interest rates to encourage corporate investment.  Investment leads to an increase demand for workers.  Higher employment leads to increased consumption/spending and profits.
  
• If interest rates are lower, what will happen to your monthly mortgage payment?
  - Most people have fixed-rate mortgages.  For these people, they will see no benefit unless they refinance their home at the lower interest rate.  People with variable-rate mortgages will see an immediate benefit.
  
• Why might these people not be able to refinance their homes?
  - They may be unemployed, have a second mortgage, or are employed but have fallen too far behind on mortgage payments.
  
  

Role Play: Imagine you are a U.S. homeowner who is having difficulty making payments on your house, but not yet in foreclosure.  Would you like to join the program and exchange the ownership (deed) in your house for lower rent?  Discuss the pros and cons of joining this program.

View My Other Lessons

LingoPass! LLC

http://www.lingopass.com/blogs/