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Citigroup's odd foreclosure rental program

August 10, 2012: 5:00 AM ET

The bank is trying to dump loans and claim it's helping borrowers at the same time.

rent vs buy

FORTUNE -- Citigroup is getting into the rental business, at least it says it is.

On Wednesday, the bank launched a program to rent out 500 homes to homeowners who are having trouble paying their mortgage, rather than put the loans in foreclosure and kick the owners out. Homeowner advocacy groups and liberal economists have been pushing banks to offer the option to rent to borrowers nearing foreclosure. So the fact that Citi (C) was becoming the second large bank - Bank of America launched a similar program in March - to try out a rental program that would alleviate some of the pain of foreclosure seemed like good news.

MORE: Mortgage applications up, mortgages not so much

"It's another step in the right direction," says Dean Baker, an economist who has been a proponent of the rental programs.

The only problem is that Citi isn't actually renting out any homes. Why is that? Well, you know those 500 homes Citi is going to generously try to rent back to their former owners? It doesn't own those homes anymore.

In fact, Citi's "Home Rental Program," which is capitalized in its press release for extra branding power, is not really a rental program at all for the bank. For Citi, it's a sales program.

MORE: The downside of rising house prices

As part of the deal, Citi sold $158 million worth of mortgages to an investor group of Carrington Capital Management and Oaktree Capital Management. In fact, this deal isn't all that different from ones banks have been striking with investors for some time now. Like in other deals, Citi has no remaining stake in the homes, or really much say in what happens to the mortgages or homeowners.

The only difference is that Carrington and Oaktree have agreed in this instance to offer the borrower the right to hand over their home in return for getting the right to rent it back. And if they do, how long will those people be able to stay? Who knows? There's nothing in the deal that requires the investors to wait a minimum period of time before flipping the houses or evicting the former homeowners. Carrington, which is managing the homes for the partnership, says it's preference is to offer 3-year leases.

"Without Citi requiring a minimum three-to-five year time frame for the lease at a fair price, I'm not sure that this program will be very helpful to anyone other than the investors," says John Taylor, who is chief executive of the National Community Reinvestment Coalition.

So borrowers might actually be getting a worse deal in this instance. Often, investors are willing to offer more generous modifications than banks because they have bought the loans at a discount. Citi isn't saying how much it got for the loans, but you can guess that Carrington and Oaktree paid even less than usual. Why else would they have agreed to the restriction they had to try to rent out the homes before proceeding with a foreclosure. But even with the discount, it appears Carrington is eager to rent out the homes, rather than modify the mortgages.

What's more, since Citi no longer owns the mortgages, those borrowers are no longer eligible to get a modification under the $25 billion settlement agreement. Carrington could still decide to modify those loans instead of trying to rent them in lieu of foreclosure, but it won't have the added incentive to modify the loans that the banks who signed the AG settlement have. So if you are one of the homeowners whose loan just got sold there is that much less of a chance that your loan will be modified.

So why didn't Citi hang on to these homes and rent them out itself? Robert Cushman, a senior director of customer management at CitiMortgage said the bank's regulators wouldn't let it. But the Federal Reserve recently wrote a white paper advocating so called deed-for-lease programs as a way to help the housing market and alleviate the foreclosure crisis. So it seems at least one important regulator would be all for rental programs. What's more, Bank of America's rental program involves mortgages it still owns. Bank of America may end up selling those houses to investors, but it said it will only do so after they are rented back to the former owners.

So who cares if Citi is the one that is renting the homes, as long as they do end up as former-owner occupied rentals and not abandoned foreclosure blights? It might not matter. But it adds accountability. If Citi were doing the renting itself it would have more at stake to make sure homeowners are not abused.

And that may not happened, but Carrington hasn't had the best record working with troubled homeowners. In May, in an article titled "Meet Your Hedge Fund Landlord" Mother Jones detailed a number of cases in which borrowers claim they were charged dubious fees by Carrington. The state of Ohio twice hauled Carrington into court because officials believed the company was not offering good faith loan modifications to borrowers who were eligible.

Rick Sharga of Carrington, though, says the firm has a growing business of renting out homes and wants to grow that business. "Our objective is to rent out these homes," says Sharga. "If this works, Citi is inclined to ramp up the program so we would like to get as many people participating as possible." Sharga says in most cases Carrington will be able to offer rents that are significantly less than what the former owner was paying on their mortgage.

And that might be the case. But if that happens it should be Carrington's reputation that gets the boost for doing so, not Citi's.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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