Imogen Reed writes:
The Bank of America has announced a pilot scheme which will allow homeowners in danger of foreclosure to stay in their homes as tenants, with their outstanding loans written off by the bank. The scheme is initially a small one, limited to 1000 homeowners in Nevada, New York and Arizona, who will be selected by the bank. Those who are at least 60 days behind with their mortgage payments, and are underwater (that is, they owe more than their home is worth) to be eligible. They must also be considered to be at serious risk of foreclosure. They’re likely to be people who have ignored attempts by the bank to contact them, or who have tried to negotiate other ways of dealing with their arrears and failed.
Homeowners would be asked to hand over the title deeds to their homes to the Bank of America. For their part, the bank will offer one-year lease agreements with the option of renewal. It’s not clear yet how they will deal with the minutiae of becoming a landlord, dealing with broken boilers and landlord insurance claims. Rents would be set at what the bank determines to be at or below market level, and tenants would have to demonstrate that they would be able to pay the rent being asked for. For some, this may lead to a reduction in monthly payments. The Wall Street Journal gives the example of a $250,000 dollar home with mortgage payments of $1600 per month, having a rent of $900 per month set for it. How this actually works in practice remains to be seen.
An alternative to foreclosure?
There have been calls from consumer groups and others for banks to try and find alternatives to foreclosure. In neighborhoods with high foreclosure rates, communities have been severely damaged. Could this scheme be the answer to that problem? It sounds like a good idea on paper, but it may not be as good as it sounds. It is important to remember that the Bank of America isn’t considering this option altruistically. They presumably think that there is something in it for them. While the scheme could allow people who would otherwise have to move to stay in their homes, what happens after the one year lease is up? If market conditions improve it may be that the bank decides to sell homes on at that point, making the scheme simply a delay in the inevitable, rather than a long term solution to people’s housing needs.
Another difficulty is that many of those who cannot afford their mortgage payments will not be able to afford to pay market rents either. If someone is several months in arrears on their payments, as they need to be to qualify, they’re probably in deep financial trouble. Those with a temporary problem might only have a single missed payment and would probably be willing to co-operate with the bank to arrange paying it back. Those people don’t fall under the scope of this scheme. Local market conditions will affect whether those eligible can actually pay rent on their homes, as will the purchase price of the home. In areas with high rents, someone who bought before the market peaked might be paying less per month on their mortgage than they would in rent.
While for those in financial difficulty, this scheme might seem to provide an easy solution, it would be a good idea for those approached to be part of it to take care before agreeing. The option of remaining in your home, without having to suffer the indignity of foreclosure, is an attractive one for those having problems. However, it may be worth trying to hang on as a homeowner for as long as possible, to see if the market improves in the mean time. The foreclosure document forgery scandal has meant that it is harder than before for banks to foreclose. Part of the bank’s motivation for bringing in this scheme is, no doubt, to give them an easier way to deal with bad debt without having to go through the foreclosure process.
This could be a beneficial scheme for some, but overall, there are some substantial problems associated with it, especially doubt over whether those in danger of foreclosure will actually be able to pay rent for their homes.