(BAC) Bank of America: The New Landlord

Last week, Bank of America Corporation (BAC) announced its ‘Mortgage to Lease’ initiative, allowing the distressed customers (related to foreclosures) to remain in their houses as the ownership of their property would be taken over by the company. At present, the company has launched a pilot project in the states of Nevada, Arizona and New York and only about 1,000 homeowners will become a part of this program.

BofA further stated that the customers will be chosen by the company itself. They will not be allowed to apply or volunteer for the program. Once the program is successful, it will be rolled out nationally.

Eligibility Criteria

BofA has stated that the customers who would be chosen in the pilot project will have to fulfill all the criteria that the company has listed. In order to qualify for the program, the customers must be delinquent for more than two months and be underwater (value of the property less than the loan value).

Additionally, the customers must hold the loans owned by BofA and live in that home. Also, they must have tried all other solutions – loan modifications, short sales, forbearance on payments and deeds-in-lieu – to prevent foreclosure. The customers must also have sufficient income to make monthly rent payments.

However, those homeowners whose mortgages are owned by other investors like Fannie Mae and Freddie Mac but are only serviced by BofA, will not be eligible for the pilot initiative.


Under the terms of ‘Mortgage to Lease’ program, the property owners will transfer the home ownership to BofA and in exchange their outstanding loan balances will be forgiven. Moreover, homeowners would then be able to lease their property at or below the present rental market rate for the maximum of three years.

BofA will be offering the borrowers one year leases, which will have an option for renewal in the following two years. The homeowners will also be relieved of certain other financial obligations such as property taxes and home insurance.

BofA would be retaining the ownership of the property at the initial stage and work with the property management firms to supervise the rental homes. After a period of time, the company would sell the same to outside investors on the condition that previous owners are not evicted from their homes.

Viability of the Program

Until now, when a property owner failed to pay the mortgage, banks mostly focused on modifying the loan, primarily through lower monthly payments. When these procedures did not work, other methods were used to prevent foreclosures.

However, if all the options fail to prevent a foreclosure, banks or mortgage servicers would sale the property to recover the loan value. However, for the banks, these procedures were pretty costly affairs.

Hence, by letting the homeowner to stay in their houses as renters, BofA is trying to avoid various expenses such as costs associated with taking back property and maintaining and reselling them. Further, if many of the borrowers are able to meet the criteria to remain as renters, the company will be able to sell these properties to investors who would keep the current owners as renters.

In the current housing market scenario, there are many investors who are buying foreclosed properties and then giving it back on rent.

This program will also benefit the overall housing market by stabilizing the overall property prices. There will be an upsurge in foreclosure activity across the nation after the $25 billion foreclosure settlement deal between the five large servicers – JPMorgan Chase & Co. (JPM), BofA, Citigroup Inc. (C), Ally Financial Inc. and Wells Fargo & Company (WFC), 49 states’ attorneys general and the regulators, which was reached last month.

BofA’s present initiative will help prevent foreclosures. Also, the company stands to gain from lower costs and improved credit quality as its balance sheet will be able to get rid of the delinquent properties.

BofA currently retains its Zacks #3 Rank, which translates into a short-term Hold’ rating.

BANK OF AMER CP (BAC): Free Stock Analysis Report

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