Pilot Programs Allow Homeowners to Avoid Foreclosure, Rent Their Houses

As the American housing market continues to struggle, several banks are making an effort to lessen the financial burden on distressed homeowners.

Citigroup is implementing a pilot program this month, along with Carrington Capital Management, that will turn hundreds of delinquent borrowers into renters. This will allow people who would otherwise be forced out of their homes and face foreclosure to stay put.

Reports indicate at the end of the first quarter of 2012, 11.4 million mortgaged residential properties were in negative equity, meaning the house was mortgaged for more than it was worth.

Customers enrolled in this pilot program would be required to transfer their mortgage deed to Carrington Capital. Oaktree Capital Management would be responsible for servicing the loan. In order to execute the deal, Citgroup’s mortgage unit has sold Carrington and Oaktree $158 million of mortgages.

Citigroup is initially offering the program to approximately 500 homeowners who have been delinquent on payments for 120 days and are out of options because they owe more than the property is worth. The bank will choose the first homeowners for the pilot program, and will initially target areas in tough housing markets such as Arizona, California, Texas, Florida, Nevada and Georgia. Nevada currently has the highest number of loans deemed underwater at 61 percent, with Florida and Arizona not far behind at 45 and 43 percent respectively.

This program could make a substantial difference to people living in the areas most affected by the overall rapid reduction in housing values.

The rent collected each month is anticipated to be less than the borrower’s regular mortgage payment.

Bank of America Pilot Program

In March 2012, Bank of America launched a comparable pilot program to approximately 1,000 homeowners in three states: Arizona, Nevada and New York.  Those mortgage holders who were at least 60 days delinquent on payments and underwater on their home were eligible to participate. Similar to the Citigroup program, once the homeowners transferred the property title to the bank, the debt was forgiven.

According to the agreement, Bank of America customers would then be eligible to lease their home from the bank for up to three years. The lessee would pay market value — a sum that is expected to be less than the old mortgage payment. Not only would the monthly payment be lower, but the tenant could save money as he/she would no longer be responsible for property insurance or property taxes.

It is anticipated the program will not only prevent homes from going into foreclosure, then sitting empty and possibly deteriorating during a challenging housing market, but eliminate the anxiety many people face when having to move from their home. Bank of America announced it may sell some of the homes it acquires to real estate investors, with the intention of keeping the former homeowners as tenants.

The opportunity to avoid foreclosure without having to uproot a family is anticipated to make a substantial difference to not only the people living in the homes and the banks that provided the loan, but also the surrounding real estate market. Reducing the number of foreclosures could possibly help stabilize real estate values by keeping hundreds of distressed properties from ever reaching and affecting the market.

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

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    Sources:

    1. CoreLogic online (2012, July 12). CoreLogic Reports Negative Equity Decreases in First Quarter of 2012. Retrieved from http://www.corelogic.com/about-us/news/corelogic-reports-negative-equity-decreases-in-first-quarter-of-2012.aspx
    2. Finkle, V. Citigroup Pilots Mortgage-to-Lease Program. (2012, August 8). Retrieved from http://www.americanbanker.com/issues/177_153/citigroup-pilots-mortgage-to-lease-program-1051684-1.html
    3. Hsu, T. Bank of America turns foreclosure-facing homeowners into renters. (2012, March 23). Retrieved from http://articles.latimes.com/2012/mar/23/business/la-fi-mo-bank-of-america-foreclosure-rent-20120323