Mar262012
Bank of America to lease homes to loan owners
It’s always better to get something from a house rather than nothing. Home is considered as an asset and using a website such as getcash.com to get a loan to buy the house, is undoubtedly one of the best investments a person can make. 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.
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.
1) confirms the value of the underlying asset is not worth its stated value
2) new income stream for BofA
3) from the banks perspective, confirmation that homedebtors are viewed as useful idiots
Big losses ahead for Chase from amend-extend-pretend dance
Moody’s: Foreclosure Timelines on the Rise; More Losses to RMBS
Foreclosure timelines are on the rise, and the increase is resulting in greater losses to residential mortgage backed securities (RMBS), according to Moody’s Investor Service’s Servicer Dashboard for the fourth quarter 2011, released Thursday.
The average loan in foreclosure has been in the process for 571 days, but judicial states are weighing heavily on that average.
Foreclosures in judicial states have aged an average 654 days, while foreclosures in non-judicial states have aged an average 297 days, according to Moody’s.
The two-year timelines in judicial states are leading to a higher average age of loans in foreclosure. Ultimately, this translates to increased losses for RMBS.
“Because loans that have yet to complete foreclosure are already much older than those that have already completed the process, they will incur greater costs, which will lead to higher loss severities to the RMBS trusts upon liquidation,” Moody’s stated in its report.
Of the six banks Moody’s observes, Citi is experiencing the lowest rate of aging in both judicial and non-judicial states, 561 days and 230 days, respectively.
GMAC loans are aging the most in judicial states 691 days, while Chase records the highest average aging in non-judicial states, 409 days.
However, Chase has experienced the greatest discrepancy between timelines of completed foreclosures and current foreclosure inventory with completed foreclosures averaging 264 days and current foreclosure inventory averaging 604 days.
As a result, Moody’s predicts Chase “may see the greatest impact to loss severities relative to the loans it has already liquidates.”
Additionally, as aged foreclosures are processed, Moody’s expects the timeline of foreclosure referral to foreclosure sale to increase.
GMAC holds the longest foreclosure timelines for Alt-A and subprime loans, and Bank of America holds the longest timeline for jumbo loans.
Total cure and cash flowing rates declined at GMAC, Citi, and Wells Fargo over the fourth quarter for all loan types.
Ocwen also experienced a decline from a 44.1 percent total cure and cash flowing rate for its subprime loans to a 33 percent rate in the fourth quarter.
However, Ocwen attributes this to its acquisition of Litton Loan Servicing.
NOD originally filed in January of 2008…… 4+ years of litigation to delay a foreclosure. Wow.
This was supposed to appear below re: the California court decision…
With four years of squatting, even in losing, this guy won.
Foreclosure okay without a ‘note,’ per California court ruling
By Kerri Panchuk March 21, 2012 • 4:17pm
A California appellate court ruled it was OK for the party initiating a foreclosure to do so without being in possession of the mortgage note.
The decision shows attorneys how foreclosure contests can play out in nonjudicial foreclosure states when specific foreclosure processing provisions are already in place.
The Sixth District Court of Appeals of California held that state statutes “do not require that the mortgage note be in the possession of the party initiating the foreclosure.”
Ultimately, the court rejected a plaintiff’s petition for a quiet title to property and declaratory judgment on the grounds that the foreclosing parties did not have physical possession or ownership rights to the promissory note.
The appellate court disagreed with this claim, holding that Section 2924 of the California Civil Code does not require a party initiating foreclosure to actually be in possession of a note.
The decision is tied to a lawsuit originally filed by Stephen George Debrunner against Deutsche Bank National Trust Co., the foreclosure trustee Old Republic Default Management and the servicer Saxon.
The case and its outcome highlight the differences that surface when working in nonjudicial foreclosure states as opposed to judicial foreclosure systems.
Judicial foreclosure states require foreclosures to pass through the court system, while nonjudicial foreclosure states, such as California, move proceedings through the foreclosure process using state-specific real estate laws. These differences state-by-state are likely to create varying outcomes as in the Debrunner case where the plaintiff’s claims are derailed by state law.
FHA Volume Dips in February, Re: Declining Purchases
Residential lenders originated $16.5 billion of FHA-backed single-family mortgages in February, a nearly 10% decline from the prior month as the home purchase market slowed.
http://www.nationalmortgagenews.com/dailybriefing/2010_566/fha-volume-dips-february-1029588-1.html
So much for the robust recovery.
Hey, it’s the spring selling season 🙂
I am kind of surprised that none of the people crying for the homeowner have objected to this plan. “Up to three years” means the owner-now-renter might have less time than that. What is stopping the investor from booting the former owner after a 6 month lease to get market rents or sell at a profit if the market improves? Any homeowner thinking this is BofA giving them a means to stay in their home is kidding themselves. They have simply made the process outrageously easy for BofA in exchange for a definite end date. Suckers.
It is much easier to break a lease then evict than it is to foreclose and evict. If this is part of BofA’s plan, then it’s a brilliant way to circumvent the foreclosure process.
This was my first thought upon reading about the program. Hmmm…. Sign over title to the property and give up ability to squat for a prolonged period of time.
Yes, BUT, only idiots want to squat past 12-31-12, as the Debt Relief Act goes away, and good old Uncle Tom Obama, well, we all know his position, screw everyone and then smile and lie on TV.
No thanks Chase, you can have back the “40 acres” that will never be paid off. Jam it in your backsides 🙂 And yes, I enjoy shoving it up Jamie Dimon’s a$$.
Well, in CA, for non-recourse owner-occupied loans foreclosed, they’ll be no IRS or FTB debt forgiveness, regardless of the 2012 deadline for that Act you’ve referenced.
Excellent analysis and very careful consideration of some difficult and conflicting bank practices. What the bank is doing, however, is “mining” their huge database of foreclosures for a very specific type of borrower, and thus no all-saving program of leasing will happen to hold value in any particular neighborhood as the very few “rental-flip” homes that meet Bank’s highly self serving and narrow criteria will be non-adjacent.
This plan arises because the Bank’s Junior Loan Loss and Recovery guys are saying, hey! We can prove our worth by not following the typical foreclose, empty out, and dump path, thus we get nice bonus, and their superiors saying “show us”. This approach has happened before, never worked in bulk. What the LLR guys are looking for are Very Creditworthy Tenants To Be; who will agree to Above Market Rents (that’s the whole idea here) AND who have no secondary encumbrance or back taxes often; and probably the better homes needing no messy landlord type improvements. Very few people being foreclosed on meet these criteria or will play this stupid game, but on a big enough scale, they’ll find enough for the project. As soon as the ink on the documents is dry, the Bank tries to flip the home to an investor for more money than if foreclosed/empty. In essence, the bank makes a good tenant’s credit report and income into an asset for the bank.
Failure point: those very few tenants-to-be-with-good credit otherwise, who might consider this leaseback will shop around for a better rental deal (or non-failing neighborhood) and will find it in almost all cases and thus pass(…or, who knows, the next bank offer may be even better!) Second failure point: the neighborhood is still declining otherwise, investors will know full well not to pay much premium for Mr. Creditworthy Tenant who happens to be there leftover, and the now-overpriced property because hey, look at this Tenant’s Credit! still sits on the market, and the bank discovers that it still makes a lousy landlord and hates doing so. Senior Bank Officers then fire Juniors who said they know it better and can pull this off.
Sorry, but the sun is setting on ‘old-way’ lifestyles………demographics just aren’t their to support current/future home prices in bedroom-commuter communities like OC.
Generation Y doesn’t want: formal living rooms, soaker bathtubs, dependence on a car. In other words, they don’t want their parents’ homes.
A whopping 88% want to be in an urban setting
“One-third are willing to pay for the ability to walk,” Ms. Duggal said. “They don’t want to be in a cookie-cutter type of development.
http://blogs.wsj.com/developments/2011/01/13/no-mcmansions-for-millennials/
Oracle, you’re a million miles off topic…..and quoting a 14 month old story.
Nevertheless: It’s not surprising that 28 year olds want what you describe. But they start singing another tune when they are 38. And has nothing to do with boomer, buster, X, Y, Millenial and whatever comes next.
Lastly, I dunno where you have been the last 30 years, but OC is hardly “bedroom/commuter” anymore. The days when Pop drove his Rambler up the newly completed Santa Ana Freeway to his job on Spring Street in Downtown LA ended not long after Mr Ed was cancelled.
I’ve always had difficulty accepting people prefer tiny condos walking distance from a train stop as opposed to a McMansion. Sure, people will take the condo it it’s all they can afford, but most people will want the largest, nicest home they can afford even if part of the price is a commute.
If you ask me 5 years ago and I was 26 then and single.I want to live in downtown where my work is. Just walk to work or ride the bike. Now I have a 3 year old kid and a wife, I will surely regret buying a condo near my work. Bigger house for expanding family on a nice neighborhood with a good school system is what I’m looking for now. It all depends on your situation and maybe your age too. As for me, I want a nicer and quieter home even though I commute for an hour to my work.
LOL!
Nice one MR. Spot-on for once 😉
Hey jimmydeeoc,
One look at the 405N or 5N ‘crawl’ out of Irvine every weekday morning says you’ve got your head buried in the sand. Just say’n.
IR- I’m not sure where you’re getting this notion that investment funds will be cashing out en masse within 3 years. Most are looking at cashing out after 6-7 years, with the next 2 years comprising the “acquire” stage. While investors wait for appreciation to commence, 6-10% cap rates will provide a respectable return, and some funds will utilize leverage to further enhance that.
The funds will start to scale out not long after they complete their acquisitions. I know because I just completed a business plan for one.
Fair enough. Different funds will have different hold times. Some will see the cashflow as a good enough reason to hold for longer, and others will want to cash their chips more quickly. It probably depends, in part, on their ability to manage property effectively, which could provide some unforeseen challenges.
There’s also the risk that substantial appreciation won’t occur within 3 years, so those with a shorter timeframe may be depending too heavily on banks to provide a bulk discount for their models to work. It will be interesting to see how this thing plays out in real time.
One of the largest funds pursuing a buy-and-rent strategy and making headlines of late cited 6-7 years which is why I said that. I’m also familiar with some of their internal strategy..