Equitable Realty and Services

The Economic Implications of the Mortgage to Lease Pilot Program

It’s been a few weeks since Bank of America first introduced its newest pilot program – Mortgage to Lease – and still the Real Estate world is buzzing.  As a quick refresher, the Mortgage to Lease program is the latest alternative to foreclosure, and was initially extended by Bank of America to 1,000 homeowners within Arizona, Nevada and New York who fit the pre-screening criteria.  Within said program, Bank of America screens for homeowners who are at least 60 days behind on their mortgage payments, have been declined a loan modification, and who owe more than their house is currently worth.  Much like the well-known practice of deed-in-lieu of foreclosure, homeowners will be asked to deed their properties back to their lenders [i.e. Bank of America].  However, home occupancy rights will not be surrendered with the forfeit of home ownership in this program, as these former owners will be permitted by their lenders to rent the house at or below market rents for a period up to three years.  If the occupant honors his / her established lease terms, and if significant credit reporting negatives can be avoided, the occupant will have an opportunity to obtain Bank of America financing to (re)purchase the property at the end of the two to three year period.  In fact, Bank of America guarantees their lessees financing who remain compliant with their lease arrangements.   

Analysts have been keeping a close distance and are still hopeful the program’s initial success and popularity will lead to further expansion, possibly even nationwide. Let’s assume for a moment these analysts’ optimism become reality, and that the Mortgage to Lease program continues on its path of success over the next several months, given its initial trajectory and welcomed reception in its early stages.  What economic consequences, if any, can we expect from the Mortgage to Lease program in the Real Estate market?

For starters, we can expect an immediate reduction in inventory on the open market, all else being equal, as many homeowners denied loan modifications will now have another option outside the short sale path.  As a Realtor within the greater Los Angeles area, my first reaction is to worry about diminishing sales opportunities.  However, I take solace in the basic economic principle of decreased supply increasing price, given constant demand levels.  Thus we should witness the welcomed secondary effect of increases in the home price index as a result of the Mortgage toLease program on active inventory on the MLS. A reduction in inventory to us agents could truly be “a blessing in disguise.” 

Another side effect of the Mortgage to Lease program, as it pertains to decreased inventory, is the potential stabilization of home prices due to less deferred maintenance.   A huge stigma of the housing market dominated by short sale transactions is the constantly deteriorating property conditions.  The combination of apathy from homeowners not caring to maintain their properties while under short sale review, and the listing agents’ understanding that worsened property conditions may even assist their short sale approval successes, produces a lethal cocktail of declining property conditions and hence, prices.  Such attitudes will be largely stricken from the record with this Mortgage to Lease program, as homeowners will now be encouraged to maintain their homes, as they will no longer be relocating. 

A tertiary consequence of this new program, which falls in line with the above, is less opportunities for squatters, break-ins and vandalism.  Now that homes previously being foreclosed and left vacant for months on end will remain owner-occupied, property conditions should be further sustained.

A final consequence I can forecast which adds another potential chalk-mark to the positive side of this equation, is the foreseeable decrease in competition within short sale negotiations.  One major complaint agents [and their hired negotiating teams] have with today’s market is the length of short sale review timelines.  With the Mortgage to Leaseprogram now an additional avenue for homeowners  to avoid foreclosure, the number of short sale files under review should be decreased.  The remaining short sale files left behind will be competing against fewer files, which could translate into quicker review times and higher closing success rates.

So, from an economic perspective, the Mortgage to Leaseprogram may go a long way in curing the disgruntled housing market.  Although inventory and sales opportunities may be reduced, home prices should not only be stabilized by a reduction in deferred maintenance and break-ins, but bolstered by the economic principle of decreased listings increasing home prices.  The existing short sale market will likely be positively influenced by the Mortgage to Lease program, as the decrease in short sale files should reduce review times and increase successful file closing rates.  All of these variables together tip the scales in favor of the Mortgage to Lease.