Program rents foreclosed homes to owners
Most creative ideas are a result of a difficult situation inspiring an ingenious solution. There have been many proposed solutions to the housing crisis, but the most recent one may very well be the most practical.
It may be hard to believe, but Bank of America, one of the nation's leading mortgage lenders, is starting to think in a very sensible way. At the end of March, the bank announced that it has begun a pilot program offering some of its mortgage customers who are facing foreclosure a chance to stay in their homes by becoming renters instead of owners. The Mortgage to Lease pilot program is being offered to about a thousand Bank of America customers in test markets in Arizona, Nevada and New York.
Participants in the program would agree to a deed-in-lieu of foreclosure, where they essentially sign over ownership of the property to the lender. This process is less costly to the bank and also does less damage to a borrower's credit than a full blown foreclosure. In exchange, they will be able to lease their home for up to three years at or below the rental market rate as long as they demonstrate the ability to pay the agreed upon rent.
Not only will the rent be less than the participants' current mortgage payments, but customers will not have to pay property taxes or homeowner's insurance. In order to qualify for the program, homeowners must have a Bank of America loan, be behind at least 60 days on payments and be underwater, owing more on their mortgage than the property is worth.
The obvious benefit to families is not having to face the stress and humiliation of moving and relocating children to a new school, as well as the financial advantage. The bank benefits by not having to endure the cost, about 5 percent of the face value of the mortgage, and paperwork that goes along with a foreclosure. It also doesn't have to face maintaining and selling the property in a still recovering real estate market.
However, there could be a downside for Bank of America and other banks that may consider a similar program. Like any landlord, banks could face problem tenants that have to be evicted and a public relations nightmare by not offering the program to all underwater homeowners.
For the moment Bank of America plans on owning the homes with the option down the road to sell to investors. If the program is successful, it could be expanded to include real estate investors who buy qualifying properties and keep the occupants as tenants.
The government proposed a similar program through Fannie Mae called deed-for-lease, which has been on the books since 2009. However, the program is not publicized and has had little if any impact on the housing problem.
The Bank of America program shows that at least someone is thinking outside of the box. It may be a long shot, but certainly worth trying especially since it's not costing the taxpayer one cent. These are the types of programs the government should get behind and encourage with the hope that other lenders will get on board.
The phrase "Necessity is the mother of invention" has no definitive author, although Plato is suspected. What is definitive, however, is that there's always a way to make a bad situation better given a little creativity.