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BofA tests alternative to foreclosing homes

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POSTED March 29, 2012 7:04 p.m.

Banks may finally be getting it.

For the past four years much of the resale market has been dominated by investors who have snapped up foreclosures at bargain basement prices and then turned around and rented them, more often than not, to people who had lost their own homes to foreclosure.

The investors typically started off with a positive cash flow between rent receipts and their mortgage payment. A small but growing number of investors where people with money socked away but have been frustrated because banks weren’t paying much more than token interest due to the housing market dragging down the economy.

They have found they could take $100,000 out of the bank, pay cash for a home and put their money to work pulling in much more than 2 to 3 percent interest on money that banks were paying them in interest. Ironically, they often used the money they withdrew to buy homes foreclosed on by the bank they had their money on deposit

The bank, meanwhile, took the full hit not only on just losing a large chunk of the money they invested in the home they made the loan on but also had to go through the expense of foreclosure plus suffer through six to 14 months of the property the mortgage is attached to not generating any revenue or cash flow.

Combine that with statistics from the Census Bureau showing over the past six years home prices have dropped 32 percent while rents are up 20 percent and you have the perfect “duh” moment.

That is why Bank of America last week rolled out its “Mortgage to Lease” program. It allows select homeowners at risk of foreclosure to basically hand over their deeds and leases that allow them to rent the home back from the bank.

BofA decides who gets such an offer. The program is in its infancy and initially is being only offered in Nevada, Arizona, and New York. If it is successful it could be expanded elsewhere including California.

The lease is for one year. There are options to renew the next two years at rents the bank decides are at or below the going market rate.

Such a move is less damaging to a borrower’s credit and is less costly to the bank.

It also is less damaging to the housing market by avoiding putting a home on the market at a price that will drive down nearby values.

An example given by the bank involves a $230,000 mortgage in Phoenix with a monthly payment of $1,600. If the property is in good condition and in a stable location the bank could offer to swap a deed for a lease that would lower the monthly housing cost for the owner-turned-renter to $900 a month.

If all goes to plan the homeowner wins, the bank wins, and the neighborhood wins.

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