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
This is less about doing what is good for the economy and consumers and more about their own self-preservation. I have way too many clients that have not made a payment in over three years and still do not have an NOD filed. I am just one person who has several clients. Multiply that across the country and the number is huge. They are trying to figure out how they can kick the accounting can down the road further by this process and keep the asset booked at full value. FNMA/FHLMC are insolvent perpetrated by banks who dumped their underwater mortgage assets onto the taxpayers. Since they cannot make loans they want to collect fees managing the properties from FNMA/FHLMC. Just trying to suck more money out of a stupid government who they can manipulate.
If it is going to be sold to an investor for a lesser amount than what the homeowner owes, why not sell it to the homeowner for that same low price instead? With a lesser loan amount and lower interest rate most will be able to make the payments.
I strongly feel that BofA should consider this option to previous homeowners under certain critieras. In example, loss of employment and the mortgage payments were current until that time. Death of a co-borrower on the property and children are part of the family in school or working to help surviving parent manage the household. In cases where the loans where in adjustable rate mortgages and the increased payments escalated to rapidly in the depressed economy. Rewrite the loan and lock them into fixed mortgages based on income only. BofA would have less dumped properties on hand, some income beats NO interest income any day. Have owners submit annual tax returns to verify all income throughout the life of renting to adjust rental increase and monitor the credit reports for frivolous credit card debt.
Another option, rework loan as a rent to own again. The loan based on current income that will help the homeowners that maintained their scheduled payments until their hardship. Note the defaulted mortgages SHOULD NOT be rated in the open SFR RE market for comparables with “clean SFR RE market sales”. Rate them in a RE market in a separte classification “recovery based SRF homes loans” the category for fixed amounts. This might help BofA with their loss of interest income in business tax obligations. Be creative with negations based on “individual” basis. It will take time and the heart of the financial teams to establish an equitable plan for both previous owners to cover their home owners dreams/values, and BofA overhead of unoccupied properties that are at risk of vandalism or angry wrath.
Note: The inflation of the RE market valve SHOULD NOT be based on DEMOGRAPHICS either that is unfair to the overall housing market.
Pray for wisdom…it can be done!
bank system is broken. No one has an answer we can all agree on. How about NO house payments for the entire country for 90 days? Let the banks interest payments go back into the economy? Better yet a year of no payments and no interest. Our ecomomy would explode !!!!! Stocks would rocket and spending would skyrocket/
Just a thought…..consumption would restart by directing all the cash back into the economy. Fantasy? Millions of foreclosed homes expose the reality. Millions have already done the no payment plan…………..
..Happy Selling……2012 looks good !!!!!