You have probably heard about this new mortgage to lease program that Bank of America is touting as the next solution to the foreclosure crisis that is again looming as many more Adjustable Rate Mortgages are coming due. Many people may find this option appealing, in general — to stay in the same home you were in, pay less per month and have the rest of the debt forgiven. However, it results in a worse solution for people than merely just walking away from the home, but allows the bank to continue to profit off of you. You will still have the credit hit of the foreclosure, and instead of living in the house without a house payment, you will be making a monthly payment to the bank.
Let’s look at what the program actually does. According to Bank of America’s media room, found here this is merely a pilot program. It may not actually go into affect. The people that will have an opportunity of using this program have already been selected.
This pilot program will only attempt to help 1000 homeowners. That’s not very many when you look at the areas the program is to be “tested” in. These areas are limited to Arizona, Nevada, and New York. As I am in Arizona, that does offer some assistance for my clients. But I wonder how many. I have to assume that New York will receive the most assistance because of the population differences in the states selected. Even if they apportion it equally, there will only be 333 customers using the program in each of the three states. However, for states like California and Florida, which were also significantly impacted by the real estate bubble bursting, there appears to be no assistance available.
Here is a list of the requirements that the “preselected customers” had to meet in order to qualify for the program:
- Have loans owned by Bank of America
- Are delinquent for more than 60 days.
- Have exhausted modification solutions or have not responded to alternatives to foreclosure, including short sale or deed in lieu.
- Have high loan balances in relation to their current property value.
- Face considerable risk of ultimate foreclosure.
- Have no junior liens.
- Are still occupying the home.
- Have adequate income to make an affordable rent payment:
Another substantial problem is the requirement that there be no junior liens. This means that you do not have a second mortgage. The problem with this is that for most of those that got into trouble with their mortgages, they purchased the home when 80/20 loans were very popular. The reason they were popular was that an 80/20 loan allowed you to avoid mortgage insurance. All of these loans would be excluded from this program, apparently, even if the second mortgage is with Bank of America.
Finally, there does not appear to have a reasonable way to determine the amount of rent that you would be paying during the program period. It claims that rent would be at or less than fair market value, however, here in Phoenix, rent is often higher than a mortgage payment on a similar property.
Bank of America states that they will own the loan originally, implying that they will then let some other investor purchase the property from underneath you. This is great for Bank of America, because then it can value the property much higher as there is a renter in the house already. This is to make the house values go up in the neighborhood, but is really of no benefit to the people paying the rent.
The major problems with this program are that you will not be living in your home essentially house payment free while you get back on your feet. In many of my clients’ cases, my clients have been able to stay in their house for years prior to being evicted or going through the actual foreclosure. This is even after a bankruptcy has cleaned up their credit, and by the time they are forced to move out they have good credit again.
Also, Bank of America has not indicated how it will affect your credit. From all outward appearances, it appears that this is what would normally be titled a “Deed in Lieu of Foreclosure.” What I would expect to happen with this program, would be that your credit rating would drop to that of a deed in lieu and as such, would have the same impact on your credit as a bankruptcy or a foreclosure would. So, instead of filing bankruptcy and cleaning up their credit, the customer would be paying a monthly payment, instead of none, he or she would still have bad credit, and would not be able to move on with their life.
This program has all the hallmarks of a win-win scenario for the banks, but a bad bargain for the consumers. Finally, I suspect that the media blitz with the announcement of this program and that the pilot program is so small, possibly means that Bank of America is just doing a publicity stunt.
Thank you for taking the time to read this post by Tempe based Bankruptcy Attorney, Glenn W. Roethler. This post may not represent the views of all members of Greeves & Roethler, PLC.