Bank of America Tests a New Approach to Forclosures

Bank of America has announced a trial of a new program for underwater homeowners in serious risk of foreclosure.  The new program will be tested with fewer than 1,000 homes in Arizona, Nevada, and New York.  Frankly though the idea makes so much sense in the current market that it is a little surprising that it wasn’t thought of earlier.

The plan is simply: (i) the underwater homeowner voluntarily signs over title to the home to the bank, (ii)any remaining balance is forgiven, and (iii) the former homeowner gets to rent the home at or slightly below prevailing local rates for as much as three years.

Economists have been in broad agreement that now that the ‘robo-signing’ challenges have been cleared, the ‘shadow inventory’ of possibly soon to be foreclosed homes is more than the weakly recovering real-estate market can handle.  Their sudden arrival in the market could cause another plunge in prices which would benefit nobody, least of all the bank.  Moreover the bank avoids the delay and complexity of foreclosure.

With this plan, the bank gets an immediate continuation of cash flow rather than a home that might sit vacant for months looking for a buyer.   In addition, it is unlikely that the home will be neglected and abused as is typically the case with foreclosures since the occupants are not going to be moving out . The bank thus avoids the often substantial costs of making a foreclosed home market-worthy (or conversely the additional loss of having to sell it as a distressed property).  The rental market is strong right now.  Rents are growing and there is even the possibility of further profit to the bank if real estate values rebound in the next three years.

It is puzzling why only a relatively limited ‘trial’ is being implemented when there appears to be no downside to this plan.

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