Congress unanimously passed a bipartisan plan last week to let FDIC-member banks lease real estate-owned properties back to foreclosed homeowners-a move that legislators hope will protect both mortgage lenders and borrowers from the worst effects of the foreclosure crisis. The Neighborhood Preservation Act “will give struggling families an opportunity to stay in their homes while riding out the housing crisis, and will be instrumental in alleviating the overall crisis in the housing sector,” said Rep. Gary G. Miller (D-California), author of the measure. Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, is a co-sponsor of the bill. Under the bill-which the House approved in a voice vote-banks may lease properties acquired through foreclosure or a deed-in-lieu for a term of up to five years. Rent-to-own options are also encouraged under the measure, which would apply only to leases signed in the next two years.

The act reflects lawmakers’ growing interest in novel approaches to limiting REO inventories, stabilizing home prices and aiding troubled homeowners, said Dr. Dean Baker, co-director of the Center for Economic and Policy Research in Washington. Previous policies and modifications “haven’t been as effective in stemming the tide of foreclosures as lawmakers would like,” said Baker, who has advised several staffs on Capitol Hill in recent weeks. “There’s a sense that they’d like to do something more.” This particular measure removes legal obstacles to a practice that could benefit lenders and borrowers alike, advocates say. Distressed homeowners may get to stay put and ultimately regain their deeds. Banks may be able to avoid adding to their glut of unsold REO. Some lenders, such as the government-sponsored Freddie Mac, already allow some of their foreclosed homeowners to stay on a month-to-month basis. “At no cost to the taxpayer, the Neighborhood Preservation Act will reduce the number of houses coming into the housing inventory and will preserve the physical condition of foreclosed properties, Miller said. That “will ultimately help stabilize the aesthetic and economic values of homes and neighborhoods.” Baker, an early advocate of “right to rent” policies as a foreclosure solution, said that while renting is an alien notion to many mortgage banks, more lenders should find it in their bottom-line interest to lease REO homes. “If you’re getting rent every month, that’s not bad,” he said. “Especially when the alternative is a foreclosed home sitting unsold.”