For distressed homeowners unable to qualify for modifications on their mortgages, a few Bank of America customers are being offered a new way stay in their homes. Instead of evicting homeowners who face foreclosure, the bank will let them stay as tenants and sell their home to investors.
Bank of America sent 300 letters in California this week inviting underwater borrowers without other options to apply for its new program, Mortgage to Lease. An additional 1,500 letters will go out in the next few weeks as BofA — which also is testing the program in three other states — evaluates whether a national program is feasible. The bank will recoup less than what’s owed but would come out far ahead compared with where it would be after evicting borrowers, making “cash for keys” payments to help them move and selling empty and often vandalized foreclosures in the troubled housing market.
Bank of America emphasized that its test program is limited to borrowers it selects, so homeowners can’t sign up themselves. It’s available only on mortgages the bank owns — just 15% of the home loans for which it collects payments. The other 85% are owned by investors in mortgage securities.
The homeowners must be at least 60 days behind on payments and must have been run through every available loan-modification program without success, because they either don’t qualify or have rejected an offer from the bank.
Those willing to become renters must resubmit financial information so the bank can verify that they can afford typical rent payments for their local housing markets. If they qualify, they’ll conduct what’s known as a deed-in-lieu transaction, swapping their claim to ownership for a lease.
The leases are for a year, with options for the residents to renew for two more years. Since the damage to credit ratings from deed-in-lieu transactions is typically erased after three years, the renters at that point would have an opportunity to buy a home again.
Other lenders (Chase, for example) continue to use large cash inducements (so called “cash for keys”) to the homeowners (up to $20,000) to encourage cooperative short sales. Many homeowners have found this option an incentive to move and get out from under their debt.
For the homeowner, it remains to be seen whether the option of becoming a tenant in one’s own home is preferable to a short sale, which has been the primary option when modifications fail. According to most of my clients, modifications have been impossible to complete. Now, in this program, a third party investor will profit from the bank’s inability or unwillingness to assist through modification. A deed-in-lieu continues to be a less favorable credit result than a short sale. There are lenders in the marketplace today who will lend immediately after a short sale, without a three or seven year waiting period. Ultimately, the homeowners will decide whether this option, which clearly has benefits for the lender and investor, is a benefit to them.