Unable to qualify for modifications on Bank of America mortgages, a few of California’s most distressed homeowners are being offered one last chance to stay in their homes: Become renters instead.
Testing a mortgage-to-lease program in the Golden State, Bank of America Corp. sent 300 letters this week inviting borrowers without other options to apply. An additional 1,500 letters will go out in the next few weeks as the bank -- which also is testing the program in three other states -- evaluates whether a national rollout is feasible.
Bank of America plans to sell the homes to investors. It typically would recoup far less than what’s owed but would come out far ahead compared with where it would be after evicting borrowers, making “cash for keys” payments to help them move and selling empty and often vandalized foreclosures in the troubled housing market.
Evicted homeowners tend to look for single-family homes to rent in their own neighborhoods anyhow, so why not let them exchange the deed to the home for a lease, BofA executive Ron D. Sturzenegger said.
“It’s good for us, it’s good for the borrower and ultimately good for the community,” said Sturzenegger, who oversees 50,000 employees handling workouts and foreclosures on troubled loans.
Borrower advocates say the approach, providing a cushion for homeowners at the end of their rope, is long overdue. They point out that mortgage giant Fannie Mae has had a similar “deed-for-lease” program for 21/2 years for the occupants of foreclosed homes it owns.
Some investors already have been pursuing similar goals, such as the partnership that acquired Eduardo and Juanita Quezada’s home in Moreno Valley.
The Quezadas’ financial setbacks began in 2005, when they refinanced the home after a strike at the supermarket chain where they worked. The walkout wiped out their savings.
Bank of America, which serviced their loan, began foreclosure proceedings in October 2010 after the couple fell behind on payments. Lengthy efforts to qualify for a loan modification were denied, the couple said, because their household income fell short of their monthly expenses by $90.
TwinRock Partners of Newport Beach bought the three-bedroom, two-bathroom home at a foreclosure sale last year and worked out a deal to rent it to them for $1,310 a month, about $40 less than their old mortgage. Staying in place helped them at the time, but has been a difficult experience, Eduardo Quezada said.
“We both have jobs, me and my wife. I thought for sure we would work it out some way,” he said. “I had invested a lot in the house, and to walk away from it was depressing.”
The Quezadas, who started with a one-year lease and have signed on for an additional six months, are thinking of downsizing to an apartment in a better school district.
“It’s like going backward,” Quezada said. “It’s like you’re going back in time.”
TwinRock Chief Executive Alexander Philips said his partnership prefers to keep former owners as renters when it buys distressed homes. Often, though, the residents are suspicious and must be convinced of the advantages because the experience of losing ownership was so horrible.
“Once you get them through that adjustment, [they understand that] it actually makes economic sense to stay in the house,” Philips said. That’s in addition to “the comfort of being in their own house, the convenience of staying where they are, with the kids close to their friends in the neighborhood and keeping them in the same schools.”
Bank of America emphasized that its test program is limited to borrowers it selects, so homeowners can’t sign up themselves.
It is available only on mortgages the bank owns -- just 15% of the home loans for which it collects payments. The other 85% are owned by investors in mortgage securities.
The homeowners must be at least 60 days behind on payments and must have been run through every available loan-modification program without success, because they either didn’t qualify or had rejected an offer from the bank.
Those willing to become renters must resubmit financial information so the bank can verify that they can afford typical rent payments for their local housing markets. If they qualify, they will conduct what is known as a deed-in-lieu transaction, swapping their claim to ownership for a lease.
The leases are for a year, with options for the residents to renew for two more years. Since the damage to credit ratings from deed-in-lieu transactions is erased after three years, the renters at that point would have an easier shot at buying a home again, Sturzenegger said.
The program will be expanded only if it works out for enough borrowers, bank officials said.
The results from tests in Arizona, Nevada and New York, where Bank of America is finishing up mailings to 1,000 troubled borrowers, won’t be clear for 60 days, a spokesman said. He said he was unable to find borrowers in those states who had accepted a rental agreement and were willing to talk to The Times about it.
Among investors, demand is strong for distressed properties that can be turned into rentals.
Such buyers have created cutthroat competition for foreclosed properties, said Evan Gentry, CEO of the Irvine investment firm G8 Capital. G8 has acquired more than 2,500 single-family homes, mostly to fix up and sell, but has kept 350 of them as rentals, including 250 in California.
Annual returns on the rental conversions are typically 7% to 9%, with the prospect of selling the home later at a profit if the housing market improves and prices rise, Gentry said.
“There is very significant interest from small investors to large institutional investors,” he said.
Kevin Stein, associate director of the California Reinvestment Coalition, a San Francisco-based advocacy group, welcomed the BofA program as a way to limit damage from the foreclosure epidemic.
Stein said the bank also should develop aggressive programs to assist current renters put in jeopardy when banks foreclose on their landlords. He said 1 in 3 California foreclosures involves a home occupied by renters, many of whom are displaced against their will.
Bank of America executives said the institution honors all leases and month-to-month agreements signed by the tenants of foreclosed properties.