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:
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.’