Should BofA and other private banks and lenders consider renting an REO property back to the former homeowner?

  • Yes (73%, 163 Votes)
  • No (27%, 59 Votes)

Total Voters: 222

BofA has maintained the conservative position (read: unchanging) of opposing leaseback arrangements with former homeowners. Along with the other Big Lenders, they sense they are creating a “moral risk” dealing with these delinquent borrowers.

However, the bank purports to be looking into an alternative foreclosure program to rent back real estate-owned property (REO) to its former owner if he is still in possession. Do we sense a seismic change of heart here?

BofA is considering two possible leaseback arrangements, which include

  • selling REO to an investor who will lease it back to the owner/now-turned tenant; or
  • entering a deed-for-lease with the former owner, in which the property will be sold through a shortsale transaction and then leased back to the former owner, thus preventing the property from ever entering the foreclosure process.

Under both of these arrangements, BofA hopes to relieve pressure from its current REO backlog and stem another massive tide of foreclosures resulting from its 1.1 million properties that have been delinquent for 60 days or more.

first tuesday take: Screams are being heard, maybe. Looks like Big Lender BofA is drawing inspiration from the Federal Housing Finance Agency’s (FHFA’s) recent efforts to develop an REO rental program. [For more information on the government housing agency discussion of how to deal with REO inventory, see the November 2011 first tuesday article, Frannie’s REOs lying around with nowhere to go and the September 2011 first tuesday article, REOs for rent.]

In recent years, BofA, Chase, CitiBank, Wells Fargo and a collection of smaller banks have all made regular use of the Affidavit of Arm’s Length Transaction (affidavit) form in the signing of a shortsale transaction before escrow closes. All signatories to the affidavit, including brokers and escrows, are prohibited from leasing the sold REO back to a former owner. (Nonsense!)

With Freddie Mac, the affidavit is signed under penalty of perjury – just another taste from the sampler of lender and government policies established to protect the losses of lenders and punish negative equity homeowners and inhibit buy-to-let investors. [For more information on the leaseback prohibition, see the November 2011 first tuesday article, Undue restriction: the shortsale leaseback prohibition.]

It’s difficult to get excited about the PR buzz being generated by BofA over the prospect of REO rentals in light of the history of the affidavit. And since the FHFA (which is farther along in the REO rental brainstorming process than BofA) hasn’t even come up with a plan, don’t expect the miracle of a leaseback arrangement by the New Year.

However, though a return of the leaseback plan could be a long time coming, such delays shouldn’t keep California brokers and agents from petitioning their congressional representatives to:

  • first, nix the affidavit (since that is the most problematic legal barrier); and
  • second, put pressure on the FHFA to get an REO rental program going.

Once action falls into place with the FHFA, private mortgage servicers will follow. This is the best plan so far addressing the foreclosure crisis. Keeping these homes occupied (and thus maintained) is an inarguably good thing for all parties involved. Treating foreclosed-out homeowners as humans with equal rights to access property for their families will keep them in the mind to buy a home again, unencumbered by the distaste for lenders.

If lenders can take this leap into the leaseback arrangement with former homeowners, then home sales will have a fighting chance since buy-to-let investors will flock in and purchase the delinquent properties in shortsales for future leaseback. Leaseback arrangements will then further act as a harbinger of mental thaw among lenders by encouraging the pursuit of recrimination-free foreclosure relief programs, like leasebacks, because they are in the best interest of all parties. Such graces granted for homeowners in the emergency situation of this Lesser Depression will also add to the battle in ending the lender’s glorification of Fair Isaac Corporation (FICO) scores. Successful leasebacks will prove a borrower’s FICO score (read: the lender’s game of tediously counting penalties and punishments) does not accurately reflect his future creditworthiness as a homeowner, since he obviously has the ability to make monthly payments as a leaseback tenant. [For more information on the insufficiencies of FICO scores, see the December 2011 first tuesday article, The FICO farce.]

RE: “BoA development foreclosure rental programs to deal with distressed properties” from Housing Wire