There’s been a lot in the news recently regarding the relationship between foreclosed homes and the rental market. Attention has been focused on the rights of renters living in foreclosed homes as well as real estate investors purchasing foreclosed homes for use as rental properties. But Bank of America has entered the discussion with the announcement of a new program that could ostensibly turn current homeowners into renters if conditions are right.

According to an LA Times report dated March 23, the pilot program aims to help a limited number of homeowners who are facing foreclosure remain in their homes while satisfying the outstanding balance on their mortgages. The program is very simple in its mechanics, allowing homeowners to be completely forgiven of their outstanding debt if they are willing to transfer title of their home to Bank of America and then rent back from the bank in return.

“When homeowners are struggling to make payments, owe more on their mortgage than their home is worth and face certain foreclosure, one of their greatest anxieties is the transition process they face in moving from their home,‘ said Bank of America executive Ron Sturzenegge in a prepared statement. He went on further to say that if the program is successful it could “stabilize housing prices in the surrounding community and curtail neighborhood blight by keeping a portion of distressed properties off the market.”

Bank of America intends to limit the initial phase of the project to fewer than 1,000 homeowners in New York, Arizona, and Nevada. Participating homeowners would have to be at least 60 days behind in their mortgage and be underwater as well. Once the transaction is complete tenants will be able to rent for up to three years while not being required to pay property tax or insurance. Their rent will be equal to, or less than, the prevailing rate at whatever time the title transfer is made.

A Program That Makes Sense

By Senseiich (Own work) CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0), via Wikimedia Commons

By all accounts Bank of America’s program is one that finally makes sense in helping a distressed housing market. Despite belief to the contrary, banks do not prefer to foreclose on homes because it costs them far too much money that they cannot recover at auction. Furthermore, the administrative hassles simply add to the drag on the bank’s business. This is a solution which avoids foreclosure, allows the bank a real, tangible asset to satisfy the mortgage, and still allows families to stay in their homes.

As far as the homeowner is concerned, it appears to be a winning scenario as well; they wind up with a lower monthly housing payment, relief from an underwater mortgage, and no adverse effects to their credit report. Furthermore it leaves them with three full years to exercise other options should they decide to take advantage of the full lease opportunity. That’s far better than the typical 3 to 12 months homeowners have once they are faced with foreclosure.

Housing Market Stability

Bank of America’s assertion that the program could stabilize the housing market in affected communities sounds plausible enough. However, it requires a concerted effort by the bank or their property management company to ensure homes and lots are properly maintained. Since the tendency of renters is to allow properties to deteriorate, simply allowing that to happen would further destabilize the market in the neighborhoods where these houses are located.

It appears as though Bank of America has an innovative and potentially effective solution to foreclosures. If the program succeeds it may spread to other states and other mortgage lenders as well.