Bank of America is testing a “Mortgage to Lease” pilot program in Arizona, Nevada and New York. The program will make it possible for an initial 1,000 homeowners at considerable risk for foreclosure to remain in their homes as a tenant for up to three years. The homeowner will give the title of their home back to the bank in exchange for mortgage forgiveness.
Is the deal a good one?
The bank will consider individuals at risk if they have high mortgage balances in relation to the value of their home. Additionally, homeowners who have already applied for and participated in all available loan-modification programs but remain more than 60 days delinquent on their loan payments will also be considered for the Mortgage to Lease program.
It’s not hard to understand the benefit of this program to the bank. A foreclosure creates deep financial losses for lenders, even more so than a deed-in-lieu of foreclosure which is similar to the Mortgage to Lease program. The bank will recover some of its losses as the homeowner becomes a tenant and pays rent; and the bank expects to sell the homes to investment groups who purchase properties with income-qualified tenants already living in them. To the bank, this scenario offers higher returns than simply selling vacant, foreclosed properties.
The benefit to the customer is the ability to remain in their homes and pay rent that is lower than their previous mortgage payment. It will also allow the customer to save money, as they will not pay property taxes or homeowners insurance as a tenant.
The transition from homeowner to renter is made seamlessly for individuals in the Mortgage to Lease program – but what should you know before accepting the offer?
Bank of America Could Sell Your Home
Many homeowners facing foreclosure have lived rent-free in their homes for a year or more while waiting for the banks to seize the property and start the eviction property. If you choose to participate in the Mortgage to Lease offer, you will have a rent payment that is at or below current market value which may help you save money, but there is no guarantee that you will have a chance to repurchase your home.
The goal of the bank is to sell the property to investors within three months of entering the program to recover some of their losses; and the investors may have other plans for the property that could rule out your ability to repurchase your home – and those plans could also include forcing you from the home.
You Can’t Write Off Financial Losses on Your Taxes
If participating in the Mortgage to Lease program results in a financial loss, you cannot write off or claim the amount of your loss as a tax deduction. Whether or not you participate in the Mortgage to Lease program, a foreclosure sale resulting in financial losses for the homeowner doesn’t create a tax deduction.
You May Owe Taxes on the Forgiven Mortgage Debt
Whenever you owe a debt that is forgiven, the IRS considers the amount of cancelled or forgiven debt as taxable income. If you owed $200,000 on your mortgage and the foreclosure sale price of the home is $175,000 – the bank may forgive the $25,000 difference. As far as IRS is concerned, this $25,000 is taxable income.
A current exception to this rule is offered by The Debt Relief Act of 2007 and can include as much as $2 million in cancelled debt through 2012. If your mortgage was used to purchase or improve your primary residence, where your home was used as collateral to obtain the mortgage, you may be able to exclude the cancelled debt as taxable income. Consult with an attorney and an accountant to be sure.
You May Struggle With Property Management
When you become a tenant rather than a homeowner, who will be responsible for property-management issues? If a tree falls on your roof, or the furnace breaks – the responsibility to fix would typically fall to the landlord of a rental property. If you’ve ever had a lazy landlord, you might remember how frustrating that experience can be.
With the general history of banks doing a poor job of keeping up with securing and maintaining foreclosed properties, you may want to consider how that might translate to property management while you are renting the home from the bank.
What to Do if You Accept the Offer
If you are one of the homeowners offered the Mortgage to Lease program and you decide to accept, here is what you should do:
Start Saving: Use the time you have remaining in your home as a tenant to save as much money as you can. This will make your transition from this home to your new residence easier to manage.
Start Considering New Living Options: Understand that while the Mortgage to Lease program saves you from an immediate foreclosure proceeding, you will very likely need to find a new place to live within three years’ time.
This story was written by Debbie Dragon, a MyBankTracker.com contributor.