Let’s say you’re a homeowner and you stopped paying your mortage months ago. You’ve exhausted all your options to avoid foreclosure, and you’re just waiting for your house to be auctioned off before moving on. Then your lender invites you to turn over ownership of your home in exchange for being allowed to continue occupying your home as a tenant for the next three years at a below-market rental rate. On top of that, your mortgage debt would be forgiven and the foreclosure would be cancelled. What would you do?
Bank of America is hoping most homeowners would say “yes” to the offer, as it begins testing its new Mortgage-to-Lease program this month. While B of A is handpicking a group of about 1,000 borrowers in New York, Nevada, and Arizona for its pilot program, if successful the program could be offered to a broader set of homeowners (and serve as a blueprint for similar programs offered by other lenders, including Fannie Mae and Freddie Mac). Those eligible for the pilot program include homeowners whose mortgages are owned by B of A (this excludes the 9 million mortgages serviced by B of A but owned by outside investors), whose mortgages have been delinquent for at least two months, who live in their homes, who don’t have second mortgages or home equity lines of credit, and who have either exhausted all other foreclosure alternatives (such as loan modification, short sale, or deed in lieu of foreclosure) or ignored offers to apply for such alternatives. B of A would initially retain ownership of the leased homes, then later sell them to investors.
The benefits to distressed homeowners are many: They would avoid the black mark of a foreclosure on their credit history. They wouldn’t have to convince a landlord that they would be responsible renters despite their low credit rating. For homeowners living in one of the many states that allow lenders to sue borrowers to recover a deficiency (the difference between the outstanding mortgage debt and the foreclosure sale price) after foreclosure, they wouldn’t have to worry about still owing money to their lenders after foreclosure. And they would be able to stay in their homes without the worry of the sheriff knocking on their door at any time.
Despite these benefits, some critics think participation by homeowners in the program will be low. With foreclosures languishing for years in some cases, homeowners may decide to simply stay put in their homes for free, building up a nice nest egg in the meantime. Only time will tell whether these mortgage-to-lease programs will help to solve our current mortgage crisis or simply be another boondoggle.