Some homeowners facing foreclosure could get the option to stay in their homes as renters thanks to a new pilot program launched by Bank of America this week.
The "Mortgage to Lease" program, which targets hard-hit markets in Arizona, Nevada, and New York, allows participants to give up their home's deed to the bank, which will then wipe out the homeowners' remaining mortgage debt.
Customers can then rent their home from the bank for up to three years at or below the market rental rate. Participants' rent would be less than their mortgage payment and they would not have to pay for insurance or property taxes.
To qualify for the pilot program, borrowers must be more than two months past due on their mortgages and face "considerable risk of ultimate foreclosure."
If the program proves viable, properties in the pilot program would be sold to real estate investors, the bank said, who would keep the previous homeowners in place as tenants.
The program is small in scope—fewer than 1,000 customers were invited to participate—but Bank of America's new experiment with foreclosure alternatives is a shift in the way banks deal with customers struggling with their mortgage payments.
"This pilot will help determine whether conversion from homeownership to rental is something our customers, the community and investors will support," Ron Sturzenegger, legacy asset servicing executive of Bank of America, said in a statement. "This program may have the potential to further round out the broad set of solutions we offer our customers in need of assistance."
Prior to Bank of America's test program, banks generally focused on loan modification programs, which either reduced the principal or monthly payments of the outstanding mortgage, according to Nick Timiraos of the Wall Street Journal. If that failed, most other alternatives to foreclosure required homeowners to leave their homes, many times through short sales in which the bank sells the home at a loss. Banks often make short sales contingent on the new owner agreeing not to rent the property back to the former owner, Timiraos reports.
[Read: Mortgage Rates Creep Upward.]
The hope is that the program will help stem the flow of foreclosures coming on to the market, which has driven down home values in many hard-hit neighborhoods.
"If this evolves from a pilot into a more broadly based program, we also see potential benefits from helping to stabilize housing prices in the surrounding community and curtail neighborhood blight by keeping a portion of distressed properties off the market," Sturzenegger said.