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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?
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