A new program being tested by Bank of America Home Loans on a limited number of delinquent mortgages would enable borrowers to hand over the titles to their properties but stay on as renters. The program could be expanded if it proves successful.
The program, dubbed “Mortgage to Lease,” was launched this week in targeted hard-hit housing markets, the Calabasas, Calif.-based lender said in a statement to the media. It is being tested on less than a thousand pre-selected borrowers in Arizona, Nevada and New York by invitation only.
“There will not be any opportunity for customers to volunteer or apply for consideration,” the statement said.
In order to qualify, the loan must be owned by BofA, be delinquent at least 60 days and be the sole lien against the property. The loan balance must be high in relation to the current property value.
The borrower must still occupy the property and be able to afford the rental payments. The borrower also must face considerable risk of foreclosure and need to have “exhausted modification solutions or have not responded to alternatives to foreclosure, including short sale and deed-in-lieu.”
Once title is transferred to BofA, the outstanding mortgage debt will be forgiven and the borrower will be relieved of homeowner obligations such as property taxes and hazard insurance.
Borrowers will then become renters for up to three years. The monthly rental payment will be lower than their mortgage payment was and below the current market rental rate.
The program could be embraced by some borrowers who prefer to maintain local social networks and avoid the public perception that they have been through a foreclosure since there will be no obvious signs that ownership of their properties have changed hands.
Ron Sturzenegger, who was named to head BofA’s distressed asset unit in August 2011, explained in the announcement that one of the greatest anxieties distressed borrowers experience is moving out of their homes.
“This pilot will help determine whether conversion from homeownership to rental is something our customers, the community and investors will support,” Sturzenegger said. “This program may have the potential to further round out the broad set of solutions we offer our customers in need of assistance.”
BofA will initially retain ownership of the homes and utilize property management companies. But the properties will be transitioned to investor ownership.
“If the Mortgage to Lease program proves viable, it may lead to a broader program, potentially involving selected real estate investors who would purchase properties that meet their pre-determined specifications and keep the previous homeowners in place as tenants,” the announcement said.
Sturzenegger said that if the program is expanded beyond the pilot phase, housing prices in surrounding communities could be stabilized and neighborhood blight could be curtailed as a result of keeping distressed properties off the market.
If BofA sees success with the program, other lenders could be motivated — or pressured — to provide similar programs.
