Bank of America Rolls out Suspicious New Pilot Program

Bank of America (BoA) has introduced a test program in certain markets called “Mortgage to Lease,” says the Wall Street Journal. It allows BoA mortgage customers facing foreclosure to keep living in their homes by converting them into renters rather than owners. One thousand borrowers in Arizona, Nevada and New York will be able to surrender the deeds to their homes in return for 1-year leases with renewal options at or below market rates. Those homeowners who are two months or more behind on payments but can prove they can pay rent will be asked to participate in the program.

The idea is that homeowners can avoid damaged credit scores, stress and embarrassment by not being foreclosed on and being subsequently forced out. So what’s the problem that has Credit Law talking about it?

First off, even if the program ends up being beneficial to borrowers and the bank, there is little proof that it will end up being a blanket solution to the foreclosure mess the country currently finds itself facing down. It’s difficult to picture Bank of America, with all of its balance sheet woes, including homes with second liens on them – the second lien would be a complete loss for them. And there are far more borrowers with second liens who need help than those who only have a first lien, meaning those most in need of relief will likely be left off the guest list.

Another issue is property management. Have you ever had a lousy landlord? If so, you know what a mess that can be. Imagine if your landlord was your mega-corporation of a bank. Is BoA going to come rushing to your aid if your air conditioner dies or a tree falls on your house during a storm? The jury’s still out on that one.

And what, pray tell, is going to be the outcome if investors undervalue operating costs or find themselves unable to turn homes around upon expiration of the leases? It’s a safe bet that even basic maintenance will be ignored when that happens. That’s not even the worst of it: rent is likely to be inflated.

Furthermore, one has to wonder just who exactly investors are going to sell to when it dawns on them that the prices a few years down the road aren’t going to match their target returns. How that will work itself out is anyone’s guess.

Last year alone banks completed 860,000 foreclosures, according to Corelogic, Inc. While that figure is down from 2010’s 1.1 million, it’s still pretty worrying. Plus, part of the reason for the decline is that it is now more difficult for banks to foreclose thanks to the heavily publicized “robo-signing” scandal. As a result, BoA and its competitors are now exploring more cost-effective options.

Although it is too early to make a ruling on how Mortgage to Lease will ultimately turn out, Credit Law thinks everyone should keep in mind the fact that the project was undertaken to explore how Bank of America could save its own money, not that of American homeowners.