Homeowners who are facing foreclosure may soon be able to remain in their homes for up to a year under a 'Deed for Lease' program announced Thursday by Fannie Mae.

Under the terms of the program qualifying homeowners who are not eligible for modifications to their mortgage may be able to sign a lease with the government sponsored enterprise and stay in their homes during a transitional period.

Jay Ryan, vice president of Fannie Mae said that the program will help eliminate some of the uncertainty of foreclosure, keep families and tenants in their homes, and help to stabilize neighborhoods and communities.

Borrowers who qualify for the program but are not eligible for other foreclosure avoidance programs can transfer their property to the lender through a deed in lieu of foreclosure and then sign a lease at market rate. 

Borrowers must live in the home as their primary residence and must either have no subordinate liens on the property or arrange for their release.  The program may also be available for tenants where the landlord is facing foreclosure.  Both borrowers and tenants must be able to document that the new rental amount will not exceed 31 percent of their gross income. 

Participating borrowers or tenants can sign a lease for up to 12 months and may be able to remain in the home on a month-to-month bases after the initial lease expires.  Should the home sell to a third party during the lease period, the lease will be assigned to the buyer.

During the first half of 2009, Fannie Mae took possession of 1,200 properties through a deed in lieu compared to 57,000 that were foreclosed.  The rent-back provision, however, may give borrowers a needed incentive to work with Fannie.  Aside from a little less serious hit to their credit, there has been little upside for a borrower in default to cooperate with their lender, especially if they were not likely to be subject to a deficiency judgment.

A lease-back program launched this spring by Freddie Mac requires that borrowers first go through a full foreclosure before being eligible to rent the property.