Mar262012

Bank of America to lease homes to loan owners

It’s always better to get something from a house rather than nothing. Lenders finally figured this out. For the first five years of the housing bust, lenders preferred to allow delinquent borrowers to squat in the bank’s house without making any payments. Someone at BofA finally realized they could foreclose on owners or allow them to turn over the deed and stay in the property as a renter. The bank can collect rent, and if the occupant fails to pay, it’s much easier to get them out if the former owners are no longer on title.

Besides the cashflow benefits of a plan to lease properties, the plan also keeps for-sale properties off the MLS allowing the housing market to bottom. If prices stop falling, fewer people strategically default as they have hope of future equity again. This breaks the downward spiral of prices and increasing delinquencies.

The downside to the bank is most pronounced in states like California, Nevada, and Arizona where many loan owners from the bubble have mortgage payments greatly exceeding the cost of a comparable rental. Those loan owners can now default and stay in their homes. This program is a HUGE incentive for strategic default. Why pay $2,000 per month to stay in an underwater home when the loan owner can default and be offered a chance to stay and pay $1,000 in rent? This program should accelerate the deflation of the housing bubble by encouraging strategic default among deeply underwater loan owners who are paying more in rent than a comparable rental. I like it.

BofA to try converting foreclosures into rentals

BofA begins a test program for homeowners headed into foreclosure in Nevada, Arizona and New York. Borrowers will be offered the chance to stay as renters before the properties are sold to investors.

By E. Scott Reckard, Los Angeles Times — March 24, 2012

Bank of America Corp. has tentatively joined a nascent housing industry movement in which homes in or near foreclosure are sold to investors as rental properties.

The bank on Friday began a test program for 1,000 homeowners headed into foreclosure in Nevada, Arizona and upstate New York — borrowers it has been unable to help with loan modifications but hopes to keep on as renters. If successful, the program could be tried in California and rolled out nationally.

It’s most likely the bank has approached the most deeply underwater loan owners and started with them. Deeply underwater borrowers have no hope of equity, and they would be ideal candidates to stay and keep paying. Again, it’s better to get something than nothing from these properties.

Consumer advocates maintain it often would be better for homeowners, communities and the banks themselves to keep troubled borrowers on as renters rather than kick them out. Seizing and selling empty homes creates neighborhood blight and accelerates downdrafts in housing prices, they contend.

Those arguments are bullshit. Selling empty homes usually results in occupancy as the new owner either occupies the property or rents it out. It matters not whether this is done by the bank or by an investor. It is certainly not better for the banks to keep renters in place as this only encourages strategic default as others learn they can ditch their oversized payments and stay in their homes. This is a sign of desperation on the bank’s part. The one thing it does do is keep supply off the MLS which will help prices bottom.

Bank of America doesn’t plan to become a longtime landlord for borrowers turned tenants. In the pilot, it hopes to take possession of homes for no more than three months before selling them to investors making a bet on the recovering housing markets. If the program becomes established, the goal would be for the investors to take over as soon as the occupants relinquish ownership and pay the first month’s rent.

I’ll buy one. Hell, if they helped me with the financing, I would buy a hundred of them in Las Vegas.

Whether this scheme can work is to be determined by the pilot, the first such test announced by any major mortgage company. The bank wants to find out whether getting a loan off its books with a quick sale at a deep discount is a better deal financially than the foreclosure process, which can drag on for months or even years in highly regulated states such as New York.

This pilot will help determine whether conversion from homeownership to rental is something our customers, the community and investors will support,”

I predict this program will be very successful at generating investor demand.

said Bank of America’s Ron Sturzenegger, who oversees about 1 million troubled loans inherited from aggressive mortgage giant Countrywide Financial Corp., which Bank of America purchased in 2008.

That’s a lot of houses.

Homeowners can’t apply for the program themselves, a bank spokesman said.

ROFLMAO!!! Actually, loan owners can apply for the program themselves. They must merely stop making their mortgage payment.

The trial is limited to a tiny slice of the 1 million loans that Bank of America owns outright. It is not testing any of the additional 8 million home loans on which it provides customer service but which are owned by investors in mortgage bonds.

Bank of America executives said the 1,000 homeowners selected are all at least 60 days late on their loans and are not qualified for or not willing to accept other alternatives to foreclosure.

There’s the application process for loan owners. Default and be unwilling to accept other forms of remediation.

They will be offered one final deal: hand their property titles to the bank, which would cancel their mortgages in what’s known as a deed in lieu of foreclosure, and sign contracts agreeing to rent the home for up to three years at or below market rates.

Who wouldn’t take that deal? Anyone deeply underwater is foolish not to take this deal. They get out from under the big debt, they cut their housing costs, and they get to stay in their homes. BofA has become the Superfund!

Bank of America spokesman Dan B. Frahm said there are hundreds of investment groups across the country interested in acquiring troubled properties as rentals, each eyeing different regions and segments of the housing markets.

The pilot is designed to test the market for homes ranging in current value from $75,000 to $1 million, and to assess the program’s viability in states such as New York that route foreclosures through the courts, as well as states that do not, such as California, Arizona and Nevada.

Initial interest in the pilot program is likely to be strong. Betting that the housing markets are bottoming out, hedge funds, private investors and even Omaha investment wizard Warren Buffett have expressed interest in snapping up distressed or foreclosed properties to rent out or sell to first-time buyers.

Private equity funds are entering this space with vigor. The flow of money in 2012 and 2013 should be extraordinary.

Indeed, some investment firms have been turning distressed properties into rental units for years.

TwinRock Partners, a private Newport Beach firm, recently told potential investors that more than 100 homes it has acquired and rented out over the last two years have produced annualized returns of 8.7%, with the potential for big resale profits if housing prices recover. TwinRock says it tries to keep the occupants in the house as renters and has done so about half the time.

Radiant Homes II, an Irvine California based fund, has also acquired a number of properties producing returns greater than 8.7%.

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The Obama administration has said it hopes investors will buy many of the nearly 250,000 foreclosed homes owned by government-controlled entities and turn them into rentals, although the former owners of these homes already have been given the boot.

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What does this mean for housing prices?

This policy and the same one being implemented by the GSEs to convert their homes to rentals are designed to remove for-sale supply from the MLS and stabilize house prices. It will likely accomplish that goal. Since these programs were first discussed, I flatly stated this would be a game changer. However, before loan owners start celebrating the bottom of the housing market, they need to consider the downside to this policy: the rebound will be suppressed by supply for many more years.

If all remaining overhead supply were liquidated in capitulatory selling by lenders, prices would crash hard then rebound sharply up to rental parity levels in just a few years. If capitulatory selling is avoided — and this policy is designed to avoid that — then the supply of distressed homes is stretched out over several years, and the rebound will be slowed. Think about it, if the houses about to be turned into rentals were instead sold to owner occupants at very low prices, three years from now, few of these homes would be on the market, and the sales that would occur would have move-up equity from a rebound. If these properties are sold as rentals, many if not most of them will be sold again in three years as investors liquidate for a small profit. A rental program will mean fewer sales from motivated sellers today but many more three years from now. It’s those future sales that will inhibit the recovery.

Given the size of this problem, such a solution was inevitable. I have been doing my part by acquiring properties myself in Las Vegas and arranging for others to do the same. Personally, I was hoping the capitulatory selling would continue unabated and the rebound would be more robust. Now, I think all the distressed markets in non-judicial foreclosure states like California, Nevada, and Arizona will bottom this spring, and the rebound will be delayed. In some respects this is a good thing as the window of opportunity will be open longer. A slow rebound is better for the residents who buy into this market as well. They will all slowly and steadily accumulate equity and enjoy very low housing costs for the foreseeable future. This is a great time to buy below-median priced real estate in non-judicial foreclosure states ravaged by the housing bubble.

The high end is still going to crumble

It’s important to clarity my statement above. I don’t believe the entire housing market is going to bottom. The higher rungs on the housing ladder have more pain ahead, and the higher up one buys, the more pain is in store. The lowest rungs of the housing ladder must bottom first. When first-time homebuyers buy at the the bottom and prices go up, only then will those buyers have move-up equity to support higher rungs on the property ladder. Until move-up equity is restored, the high end will continue to fall, most likely for several more years. So the antithesis of my statement above is also true: this is a terrible time to buy an above-median priced home in judicial foreclosure states who have largely avoided the decline in the housing bubble. I would avoid all New York real estate, and anything above the median in Florida as well.

My monthly market reports still show the beach communities as being ridiculously overvalued. And this is not just because they are always overvalued. The beach communities are overvalued by their own historic standards. One only needs to look at properties like today’s which have appreciated 150% since 1997 to see we still have a long way to go to bring prices back to historic norms. Incomes didn’t rise 150% since 1997, and prices in nearby markets which once were this inflated have already crashed. It’s only the bank’s reluctance to foreclose and resell these properties that keeps the prices up. And these will not be candidates for rental programs because the capitalization rates will be far too low. These high end properties must go through the grinder, and with the absence of move-up equity and the difficulty in obtaining jumbo financing, there will be very little buyer support. Banks will be liquidating these homes for a very long time at the super-slow rate they are currently selling.