Bank of America Mortgage to Lease Pilot Program

Although the foreclosure crisis is making far less headlines than it once did, it is still a big problem in America.

In fact, underwater mortgages are back to 2011 levels, currently at 11 million homes or 22.8% of all residential mortgages.

For those 11 million homeowners, an underwater mortgage represents an impossible financial situation to rectify because homeowners can’t sell their home but also can’t afford the payments and for most, it will likely be many years, at least, before they see the value of their home return if they see it at all in their lifetime.

When a homeowner can’t meet their mortgage obligation, the bank or mortgage lender holding the loan suffers because the bank still has to make the payment to the investors holding the loan.  These toxic loans aren’t draining the balance sheets of these large banks but it does affect profitability and that’s bad for business at a time when banks have underperformed the stock market since 2009.

For four years, banks have tried to get these bad loans off their books.

The most notable was the rapid foreclosure proceedings that eventually led to the robosigning controversy.  Because of that, the amount of foreclosures have decreased significantly leaving most banks looking for new and innovative ways to monetize these bad loans.

The newest idea comes from Bank of America (BAC: NYSE).

Instead of trying to foreclose and evict a homeowner, Bank of America wants to rent the home to the owner.

Here’s how the Bank of America Mortgage to Lease program works:

mortgage to lease program

BofA is testing a mortgage-to-lease option to foreclosure.

Both the homeowner and Bank of America would agree to a “deed-in-lieu” of mortgage where the homeowner would sign over their home to the bank.

This is still damaging to their credit but far less damaging than a foreclosure.

In exchange, Bank of America would offer a rental rate that is at or below current rental market value based on the size of their home and the quality of the neighborhood.  They would be offered a one year lease with the option to renew the lease for a maximum of two more one year leases.

Under the current program, they could only rent for a maximum of three years.


As the Wall Street Journal explained, if they had a $1,600 mortgage payment in Phoenix on their $250,000 home, they may only pay $900 per month to rent their home.  This not only saves the bank money by not having to go through costly foreclosure proceedings but it also buys time for both parties.

Maybe the home will see a rise in value over the next three years or government programs will offer a way for underwater homeowners to escape the vice of their terms allowing the bank to recoup their investment?

Time will tell.

Sound like a good idea?

As of now, this program is by invitation only and only 1,000 invitations were sent out but if this program proves to be cost effective, it will spread to other lenders in larger numbers.

The rental market is booming in America and this program represents a way to capitalize on that market at a minimum expense to the banks.

Having less homes go into foreclosure help a community maintain its price levels.  When you see ‘For Sale’ signs around that brings home prices down (who wants to buy where everyone is trying to get out?).  When home prices stay level it gives other people looking to sell a better shot at finding a buyer at the price they need.  It also keep more homes ‘above water.’

Do you think a mortgage to lease program is a good idea?

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Published or updated July 26, 2014.

Comments

  1. This really interesting! It sounds very innovative and I’m surprised it came from BofA. We’ll see how it works out, but I don’t think BofA wants to be in the rental business right? I guess they will sell off the properties after 3 years. It will be good for struggling homeowners to lower their monthly payment.

    • It is interesting! And yes, I don’t think BoA wants to be holding these properties a few years down the line. I wonder what happens if housing doesn’t pick up? At least the property doesn’t sit and fall apart. If housing prices do go up then it should work out nice for BofA so long as there are no issues with the renters leaving.

  2. Jenna, Adaptu Community Manager says:

    What happens after 3 years, can the original owners buy back their mortgage/home?

    • I didn’t see anything about the originals owners being able to get their deeds to the homes back. I suppose if they had the money to buy the home back they could try to work something out.

      Look at it this way, these people were going to go into foreclosure and lose their homes anyway. Now they get to rent at a lower rate. What kind of cash would the original owners have to come up with to make BofA selling the house back to them worth it?

      It would be nice if the option were out there though.

      • Jenna, Adaptu Community Manager says:

        It seems like a good option for families that are really struggling. Then their kids don’t have to change schools, friends, etc. But who knows in three years, if you are really encourage/empowered/hardworking, maybe you could save up some money and get your house back.

  3. It’s a horrible idea.

    1- it doesn’t stop foreclosure, it speeds it up and simplifies it for BofA in exchange for stalling eviction, but ultimately, eviction is still likely since rent agreements will last only 3 years at maximum.
    2- Home dwellers lose the advantage of the law. The law favors property owners. Its much easier to evict a renter if they fall behind in a payment than a mortgagee
    3- I’m not sure it will stablize home prices. They are offering a 3 year rent agreement. That doesn’t mean that they couldn’t sell the rental property to a third party, who then kicks the homeonwer to the curb in year three.

    Aside from stalling evictions, I’m not sure what the upside is for the homeowners.

    • Wouldn’t the upside be that they have a guaranteed place to stay for 3 years if they maintain the rent? If they don’t maintain their mortgage (which according to Glen would be higher) they can be foreclosed on.

      I think it is a innovative idea to get cash flow to the banks and slow down the eviction process (maybe not eliminate, but absolutely slow down) to give people time to get their life back in order.

      • Sure. As I said, stalling eviction is a benefit. However “if they maintain rent” is quite a risk for someone who currently is not making payments because of financial distress and is now going to start making payments. The program changes the nature of the relationship between you, your home and the bank. What “might” stall eviction could just as easily accelerate it.

        It’s important to contrast the risks with the benefits and this program is not win-win, it’s probably closer to win-roll the die.

        • I think this is way it’s just a pilot program right now. There are a lot of ‘what ifs’ that will be interesting to see how they are played out.

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