Bank of America Tests Out "Mortgage to Lease" Program

As foreclosures continue to drive millions of Americans out of their homes, disrupting lives and in many cases causing blight and depressing property values in communities all across the country, Bank of America is testing a new approach to the problem.

On March 23 the bank announced its “Mortgage to Lease” Program, which in essence will turn banks into landlords.  They are testing the plan on a small scale, offering the program to about 1,000 borrowers in Arizona, Nevada and New York.  If it is successful, they will roll it out nationwide.  And other lenders are sure to follow.

Writing in the Wall Street Journal, BofA Tests an Option to Foreclosure, Nick Timiraos gives a comprehensive description of the plan.

Here’s a thumbnail sketch.

How it works: The plan will allow homeowners who risk foreclosure to give the bank the deeds to their houses, and to rent their houses from the bank. The bank would offer the former homeowner a one-year lease with options to renew the leases in each of the following two years.  The bank would offer a rent at or below the current market price.

An example.  Timiraos uses this example to explain the numbers.  “based on a sampling of home values and rental rates in Phoenix recently, a consumer with a $250,000 mortgage and monthly payments of $1,600 could swap the house for a lease, renting the home for $900, depending on the condition of the property and the neighborhood.

Who’s eligible: Borrowers who are at least 2-months past due on their mortgages and face considerable risk of foreclosure. They would have to prove that they are able to pay the market rent,

The benefits: the borrower would avoid eviction, the credit damage of a foreclosure and would be able to stay in their homes for up to three years.

The bank would get back troubled properties at a lower cost, avoid the high costs of foreclosure, and eventually be able to sell the property to an investor. In addition, by keeping homes occupied thus helping local neighborhoods, banks would help protect the value of other potentially at-risk properties.

Will it work? No one knows. Of course, some homeowners may say, “I’m going to lose this property anyway, why not just stay here rent free while the bank goes through the long process of foreclosure?” One way to address this reaction might be to develop a plan back to homeownership for the underwater borrower.

At the moment Mortgage to Lease is just an experiment. But if it does work it will be a great help to underwater homeowners, to banks, and of course to investors who are already buying up foreclosures and turning them into rentals.  And as home prices continue to fall and rental prices continue to rise – those investors will be lining up to seize the opportunity.