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Bank of America Turning Mortgage Holders into Renters

Written by Nickel - 15 Comments

Bank of America Turning Mortgage Holders into Renters

The latest news on the mortgage front is that Bank of America is testing a new program where they turn (former) homeowners into renters. Yes, really. It’s called the “Mortgage to Lease” program and it aims to convert those who are behind on their mortgages into leasees.

When I first hear this news, I was blown away. They’re taking former homeowners and turning them into renters? Sounds crazy. And crooked.
But it’s not actually a new idea. In fact, Fannie Mae tried something similar back in 2009, though participation was quite low.

And the more I though about it, the more I realized that its not nearly as bad as it sounds. Given that the alternative is to simply foreclose and kick people out, maybe this a win-win. The (former) homeowners get to stay put, and Bank of America doesn’t have a bunch of empty, houses sitting around falling into disrepair.

Participants will sign their home’s title over to the bank, which will then forgive the mortgage debt. In return, the they’ll be allowed to rent their home back from the bank at or below market rates (and for an amount less than their mortgage payment) with the bank being paying the property taxes and insurance.

Note: You’ll still need a renter’s insurance policy.

I’m not sure about the tax consequences here, as forgiven debts are (in some cases, at least) treated as taxable income. In this case, however, the participants are giving up their homes so, so it’s really like they’re selling at a loss as opposed to having their debt truly forgiven.

The end game will be for the bank to sell the homes to real estate investors, though they will initially be the landlords. This program is currently in the pilot phase in limited markets. To qualify, you have to have a Bank of America mortgage, be at least 60 days late on your payments, and be underwater on your mortgage.

What do you think? Is this program a good idea?

If not, what would you suggest as an alternative?

Published on March 26th, 2012 - 15 Comments
Filed under: Debt Reduction, Mortgages, Real Estate

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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15 Responses to “Bank of America Turning Mortgage Holders into Renters”

  1. 1
    Modest Money Says:

    I guess this is a reasonable option for people who are facing potential foreclosure. It beats having to pack up and move. Really though, they should’ve started offering this right when the mortgage crisis hit. Then they could’ve avoided a lot of the houses that sit empty.

  2. 2
    J Marie Says:

    At least the families won’t be put out onto the street. There are so many empty homes in some neighborhoods. It seems like such a waste.

  3. 3
    Kevin R. Says:

    I’ve seen the “win-win” put forth before — There I’d disagree. A ‘win’ for the bank would be to foreclose and replace quickly with no loss, a win for the mortgage holder would be to maintain title at a lower principle (thus lower payment). This is the lesser of the two “lose-lose” situation. The greater would be to evict and have the house empty while depreciation and cost without revenue while the occupants are on the street hunting for a place to stay with severely damaged FICO. So economically this a damage mitigation strategy, where BOA is willing to take some predictable cost hits verses unknown cost (which obviously past performance shown can be huge). The occupants would have many other reasons than merely cold finances why they’d accept this deal.

    The one winner is the rest of us. It preserves the concept of “moral hazard” in amicable way. No one is actually getting a ‘free ride,’ but in this settlement both parties loose in a way that overall has less impact on them and minimal negative externalities for the neighborhood (opposed to the other way with all the vacate foreclosed houses). In my opinion, it’s a fair deal.

  4. 4
    Leslie Says:

    Its beneficial to the mortgagee if he has no equity to mention in the home. It takes a long time to build up equity because of the extra charges and interest that are built into the mortgage agreement. But what about the mortgagees that have built a substantial equity amount? The newer mortgages are demanding a substantial down payment…say, $20,000, $50,000 or even $100,000. Your still helping the banking industry scam the public.

  5. 5
    Steve Says:

    @Kevin if your idea of a “win-win” deal is that both sides get the ideal outcome, I’d hate to be in a negotiation with you (on either side – with or against). This is a win-win deal because both sides are better off than they would have been if the situation continued as is.

    That said, I doubt many people are going to accept the offer. There is simply too much emotion surrounding home ownership, and I think too many people will find renting “their own” house galling.

  6. 6
    John @ Married (with Debt) Says:

    This actually doesn’t sound that bad, because many of these people are glorified renters anyway. There was little hope that people would ever “own” their $750,000 house anyway.

  7. 7
    Kevin R. Says:

    @Steve – “I hear you,” but I think my point is still valid (maybe better to have said a “win-win” would be a re-fi of a 30 year to 50 year or something). Actually, the “worst case scenario” still has occurred(home is lost and bank now has possession of a depreciated asset). That bit most stories seem to forget. This path is much more amicable, certainly better for the neighbors, but technically the end result is the same (of course, emotionally, this is very different and less traumatic).

  8. 8
    Steve Says:

    @Kevin It’s better for the soon-to-be-former owner because they don’t have to move. It’s better for the bank because they don’t have to pay the costs and effort of foreclosing and evicting the former owner. If the owner has any equity and/or lives in a recourse state, agreeing both gets the owner their equity (if any) or permanently removes the chance of getting sued in the future.

    Now maybe it’s not the best case for the family. Maybe they could stay in the home, not pay their mortgage (just save up the money, and see how long they can live for free in the house before the bank completes the foreclosure process. Probably months or years.

  9. 9
    Jonathan Says:

    Steve, I suppose the owner could refuse this lease option and try to ride out the foreclosure..?

  10. 10
    Kurt @ Money Counselor Says:

    Having options is good, generally speaking. I agree with Nickel though–if the former homeowner is going to get a big bill from the IRS for ‘forgiven debt’ income, the deal’s no good. And that could be a really big tax bill. I’m not clear how the deal could be structured to look (from the IRS’ point of view) as if there’s no forgiven debt. Unless maybe the bank buys the house, on paper, for the outstanding mortgage balance. But this likely wouldn’t pass the IRS’s smell test, imo.

    Another question I have is how would this show up on the homeowner’s credit report? If it looks like a foreclosure, one has to wonder why not just do foreclosure then? But if the bank isn’t going to report anything adverse to the credit reporting bureaus, that’s a big plus.

    Interesting idea, I’ll be watching to learn more details and see how it plays out. Hope I don’t come across as too much of a cynic, but part of me says, if this is B of A’s idea, it’s probably not in the homeowner’s best interest. :-)

  11. 11
    Steve Says:

    For the remainder of this calendar year, at least, forgiven mortgage debt is not taxable. It’s a bit complicated – for instance, debt forgiven in a non-recourse state is never taxable, I guess because it’s not really forgiven (since it couldn’t be collected)?

  12. 12
    John Says:

    As mentioned in the article, the homeowner must be underwater and 60 days late on payments to qualify. There is no equity at all in these situations. What happened to get people in these situations was overconfidence in the market and/or in their own capacity to earn money. The bank assumes the market risk by owning the home, effectively paying whatever the mortgage value is regardless of the market value. The rent payments are required to be less than the mortgage payment. For the owner-tenent, there is a short-term benefit of reduced monthly cost, but no lost equity. If home prices rebound, the former owner cannot reap the benefits. If they fall, they don’t lose more equity, either. As stated before, the people in this situation were not in a position to take on the market risk in the first place. Though to be fair very few could have predicted how much risk there was.

  13. 13
    BG Says:

    John) it was predicted by a lot of people. I distinctly remember debating with colleagues in California, and also successfully convincing my brother to NOT purchase a condo in Florida pre-bubble bursting.

    The california colleagues made their purchases anyway, at extremely inflated prices…they were being greedy / hoping to flip for a profit.

  14. 14
    Hank Says:

    I actually love this idea. The banks should have gone to this model a long time ago. That is the way to make lemonade as best as possible with the pile of lemons they have on their books now.

  15. 15
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