Bank of America experiments with foreclosure alternative

Bank of America has mailed invitations to nearly 1,000 customers at risk of foreclosure in Nevada, Arizona and New York to participate in a mortgage-to-lease pilot program, a spokeswoman for the bank said Friday.

Participants in the program would transfer title on their properties to the bank and have their outstanding mortgage debt forgiven. In exchange, they would lease the home for as long as three years at or below current market rental rate.

The rental payment will be less than the existing mortgage payment, and the customer would be released from homeowner expenses such as property tax and insurance.

Bank of America spokeswoman Jumana Bauwens said she did not have an estimated number of Nevada customers who will receive offers. The primary requirement for the pilot program is that the loan must be owned by Bank of America.

“The first thing you have to look at is the population of loans that we own in our portfolio,” Bauwens said from Los Angeles. “They’re not mortgage-backed securities. They’re not Fannie Mae or Freddie Mac or VA, so it takes it down from our portfolio criteria.”

Bank of America services about 80 percent of loans in its home mortgage portfolio or collects payment for other lenders and investors.

Bauwens said the goal is to gauge interest in the program and take that information to other investors to see whether they would be interested in participating.

The mortgage-to-lease program is offered strictly by solicitation, she said. Customers won’t be allowed to volunteer or apply for consideration.

Among requirements:

■ Delinquent for 60 days.

■ Must have exhausted loan modification solutions, or have not responded to foreclosure options, including short sale and deed-in-lieu.

■ Still occupying the home.

■ No junior liens, or second- or third-mortgages.

■ High loan balance in relation to current property value.

■ Adequate income to make an affordable rent payment.

One of the greatest anxieties for people facing foreclosure is moving, said Ron Sturzenegger, asset servicing executive for Bank of America.

“This pilot will help determine whether conversion from home ownership to rental is something our customers, the community and investors will support,” he said in a statement. “If this evolves from a pilot into a more broadly based program, we also see potential benefits from helping to stabilize housing prices in the surrounding community and curtail neighborhood blight by keeping a portion of distressed properties off the market.”

Mark Robbins Boud, principal of Irvine, Calif.-based Real Estate Economics, said the program is a good strategy for the bank, but it doesn’t do much more than allow the homeowner to stay in their home a little longer before losing the asset.

“The reason Bank of America is doing this is because the lease rate is going to be higher than the mortgage rate if they refinanced, so Bank of America loses less money that way,” Boud said. “Also, Bank of America’s betting on the thought that housing values are going to increase during the next three years, and that’s a pretty safe bet.

“It’s so grossly undervalued right now, especially in Las Vegas, that as the economy picks up … it’s a very good bet that housing values will increase, as well as sales volume.”

When the bank takes over the property at the end of the lease, it will quickly sell the home at a higher value, the real estate analyst said.

Fannie Mae has been “leading the charge” in renting foreclosures back to previous owners, said Linda Rheinberger, who manages a portfolio of about 250 rental homes in Las Vegas.

“Banks are not necessarily interested in putting REO (real estate-owned) homes on the market for sale at this point,” she said. “They’re interested in return on investment on performing assets in their portfolio or waiting until market conditions change. Rather than accept a loss, they’re hoping that time will cure some things, and meantime they have a decent return on investment.”

Nevada’s robo-signing law that went into effect in October may be persuading banks to put those homes into the rental market, Rheinberger added.

Bank of America won’t expand the program unless it costs less than foreclosure and resale, Bryan Kyle of First Serve Realty in Las Vegas said.

“I can tell you from experience that working with difficult renters is not for the faint of heart, and it could be especially challenging dealing with tenants who have already demonstrated financial problems,” Kyle said. “I’m all for keeping families in their homes if possible, but I believe this could be another short-term pain reliever.”

Contact reporter Hubble Smith at hsmith@review
journal.com or 702-383-0491.