Wednesday, April 11, 2012

Alternatives to Foreclosure Tested

Foreclosures continue to plague main street Americans. Working to resolve the continuing foreclosure crisis, Bank of America has rolled out a new program that it thinks might help remedy the crisis: a deed-for-lease program, called “Mortgage to Lease.” This program, allows homeowners who face foreclosure to give/return their mortgage deeds to the bank, and then, in turn, sign leases to remain in their homes as renters. Although the program remains small—and invite-only—Bank of America is attempting to create alternatives by reaching out to homeowners rather than act adversarially. BofA does not expect the “deed-in-lieu” to continue forever. If however, the deed-for-lease program proves less costly than eviction, is less costly to the bank and does not hurt the homeowner’s credit as much as a traditional foreclosure, the program may be expanded.

BofA maintains that it remains optimistic, yet realistic. Owners, after giving up the deed, would be offered one-year leases with the option to renew, at a rate the banks determines to be at or below the current market price. And if this small program works, BofA plans to broaden the program beyond the 1,000 or so homes in Nevada, Arizona, and New York that it has initially targeted. Because of increased foreclosures resulting from the big banks fraudulent “robo-signing,” banks are looking for alternatives to foreclosure, including this Mortgage to Lease program. According to the Wall Street Journal: “One of the outcomes of the ‘robo-signing’ scandal is that it is more difficult to foreclose [now]. . . .It’s more worthwhile for the banks to pursue alternatives.”

(Image courtesy of Wikimedia Commons)


  1. I believe that companies' independent solutions to make the best of a bad situation are more effective and efficient than arbitrary bureaucratic mandates to pay menial sums to select debtors (see:

    However, one potential argument against this plan is the notion that the poor get poorer. Not only are those home owners hardest hit by the mortgage collapse facing likely foreclosure, any amount of equity established in that home is about to be wiped out. Perhaps there is an argument made that the bank would have foreclosed anyway and homeowners will at least retain a roof over their heads - albeit a rented roof. However, a better scheme, and perhaps one that would prevent future indebtedness, is one that would retain owners' equity instead of going back to square one.

    At the end of the day, the American dream is to go from renting to ownership - not "mortgage to lease." However, I suppose there is an argument that neither banks, nor irresponsible homeowners, are innocent, and this simply makes the best of a bad situation.

    - Mike Bush

  2. I am optimistic that banks are looking for new solutions rather than continuing to force American's out of homes via foreclosure. Especially in light of the fact that they played a large role in allowing people to live in homes that they knew they couldn't afford in the first place.

    But again, I worry about the lack of regulations that these new "small" programs will have. These banks are putting someone with little to no options left up against big lawyers and corporations to negotiate. It is not even-handed and I fear that it will lead to contracts that take advantage of those that desperately need help.

    Further, I am curious to see how semantically the program will function. When faced with people that cannot afford a mortgage (sometimes less than monthly rental rate), how will they be able to magically afford a "fair" rental rate? It just seems like eventually the "renter" will still be in a situation (probably sooner than later) where he faces eviction.

    -Brittany Furr

  3. I tend to agree with both Mike and Brittany, and share some of the worries they propose in regard to banks' discretion in regulating this type of practice. Primarily, I think affordability is the main question. From one perspective, foreclosure is anywhere from a primary to tertiary step in an individual's declaring of bankruptcy. Many families with little to no assets tend to use foreclosure in general as a springboard for bankruptcy to escape debts which their limited assets cannot cover. A mortgage-to-lease program would certainly help families in this dire situation by providing the continuing shelter which many families during the housing crisis did not have. The question of regulation, however, is an important one in this scenario. Seeing that the market price for property rental is usually tied to a mortgage payment (with the price being at the mortgage price or above to generate a profit margin) it would seem unfair for banks to capitalize on even the market value of a property it now owns, sans mortgage. This would increase both the asset and profit value of the bank, while providing little to no additional benefit to the family. From this perspective, it is easy to see the temptation that banks would have in obtaining property through the same predatory interest rates that financial institutions have been under fire for in the past five years. By ensuring a client cannot pay for the property, reclaiming the property through a mortgage-to-lease program, and then continuing to profit off of the consumer via lease, it could create a dangerous incentive and entice banks looking to expand capital into another unregulated predatory practice.

    -Shannon Kiser

  4. The prospect and idea that Bank of America has come up with s program to turn mortgages into leases speaks volumes on where the housing market may be headed. While initially I thought a program which saves a person from losing their home is a great one it also raises many concerns.

    My first concern would be with the large amount of discretion the banks will still hold (as stated above by others) in determining who will qualify for the deed- to-lease. It seems that an invite-only program may not have the wide effect to do much for homeowners as a general group, but it will benefit the bank. The bank will have the ability to determine 1) if the homeowner will be allowed a deed-to-lease, 2) how much the homeowner will pay for to lease the home and 3)the length of the leasing term. The way I see it- the bank and everything to gain in this situation, while the homeowner is still at risk of losing their home.

    While the homeowner may not be out on the street in this scenario it seems to me that the deed-to-lease program will only be fending off the inevitable. I believe it is an excellent point made by BFurr that a fair rental rate, like the mortgage may not be affordable. At some point the homeowner is not going to be able to afford the rent (set by the bank) or the bank will determine the length of the lease is up and the homeowner will be in the same position- homeless.

    In addition, SKisser makes an excellent point that the unregulated program could lead to a predatory practice. While I pointed out the banks will have the sole discretion as to who may qualify for the deed-to-lease, and in turn will be able to exclude many homeowners I never considered the opposite. The banks could actually take advantage of this discretion to force clients into a deed-to-lease in order to reclaim the property and increase/continue to profit.

  5. Short sale is the best solution for people who face this kind of problem. Hire a reputable company to help you with this.