Dean Baker has been talking for years about right to rent, and it’s about time somebody listened to him. I just didn’t think it would be Bank of America:
Bank of America Corp. is launching a pilot program that will allow homeowners at risk of foreclosure to hand over deeds to their houses and sign leases that will let them rent the houses back from the bank at a market rate.
While the initial scope of the “Mortgage to Lease” program is small—the bank began sending letters Thursday offering leases to 1,000 homeowners in Arizona, Nevada and New York—it represents a big change in the way banks deal with borrowers who can’t afford their mortgages.
Until now, banks have focused the bulk of their borrower outreach on modifying mortgages, usually by reducing the monthly payments. When that doesn’t work, most foreclosure alternatives require homeowners to leave their house, typically through a short sale, in which the bank approves the sale for less than the amount owed. Banks often insert clauses forbidding the new owner from renting the property back to the former owner.
Would BofA make money on this? Of course. I assume that everything a bank does is to make money. They would get out of any document problems, sidestep the foreclosure process, and with market rents rising, probably make more off the home than in a foreclosure sale. BofA would sell off the homes to investors over time.
But instead of focusing on the deal for the bank, let’s focus on the deal for the borrower. Obviously it depends on your situation. But if you’re so underwater that you’ll never get back equity, but you want to stay in the home where you and your family are comfortable, this is a good plan. Even with market rents up, you’re probably saving money on your monthly payment. Your credit score doesn’t get dinged (a deed-in-lieu of foreclosure, which this would be, is much less harmful to a credit score), and you don’t have the stigma of a foreclosure victim, which could make it difficult to find even a rental property. And you’re staying in your community, keeping things stable. Property values benefit greatly from that, as does the larger economy.
Put it this way. The government is already experimenting with bulk sales of foreclosed, vacant properties (Fannie Mae actually has a right to rent pilot program, but they keep it well hidden). Why not eliminate the middle step and just keep the family in the home? It saves everyone lots of aggravation and can still work on a business level.
There are potential downsides, of course, which Yves Smith points out. If the banks won’t eat second liens, then the reach of this would be limited, which has been true of virtually every foreclosure mitigation program. And there’s still the problem of having a bank as your landlord, or whatever property management companies they use.
But if this does work, it would represent the fact that the banks have screwed up so royally, particularly BofA, that the only way out is one that accidentally benefits the homeowner in the process. Hopefully some other banks will join BofA in this effort.