Bank of America launches new approach to foreclosure epidemic
March 26, 2012
Bank of America has made some public relations missteps over the past year, but in announcing last week a new program called Mortgage to Lease, they may have made a graceful and timely move.
The Mortgage to Lease plan represents an attempt to provide a creative solution to the lingering problem of foreclosures. It won't fix the housing market, but it could ease the pain for the bank and homeowners alike.
Several potential wins
Under the new program, delinquent homeowners would be given the opportunity to surrender the title to their homes, but rent those houses for as long as three years, at rates lower than their mortgage payments had been. In the process, the bank would forgive their mortgage debt.
The Bank of America experiment is unusual in that it represents a potential win for more than just the bank. In fact, a variety of parties could benefit from the program:
- Homeowners would still lose the title to their home, but with forgiveness of their remaining debt and three years to find a new place to live, the mortgage-to-lease program could help them make the best of a bad situation.
- The bank will avoid adding to its inventory of abandoned properties, and receive some rental income while getting some extra time to put foreclosed houses on the market in an orderly manner.
- Neighborhoods will see fewer houses become empty. When a house sits empty for a prolonged period of time, it is likely the property will be poorly maintained, and the house may become a target for criminal activity. Keeping houses lived in will help preserve property values for the neighborhood in general.
- The housing market as a whole could benefit because programs like this would prevent a glut of foreclosed properties all going up for sale at the same time.
As beneficial as the program might be, its success still depends on the homeowners involved. While this won't prevent them from losing ownership of their houses, will people be wise enough to welcome a partial solution? Once those former owners become renters, will they take their frustrations out on those properties?
Initially, Bank of America will be rolling the program out on a limited trial basis to selected homeowners who are at least 60 days delinquent on their mortgages and face a high risk of ultimate foreclosure. This trial will be available in New York, Arizona and Nevada and will involve about 1,000 homes. To put that in perspective, Bank of America services a total of 9 million mortgages, and directly owns about 1 million.
Still, limited though this first trial might be, the Mortgage to Lease program is significant because it represents an attempt by a major bank to find an unconventional solution to the epidemic of foreclosures. The housing crisis is an extraordinary situation, and as such it demands an unusual response. Unfortunately, banks are generally too bureaucratic to think outside of the box, but with the Mortgage to Lease program, Bank of America is at least trying to rise to the occasion.