This week, Bank of America, one of the largest mortgage lenders in the US, announced that it was unrolling a pilot program aimed at helping their customers in default. In this pilot program being offered to less than 1,000 homeowners, Bank of America will offer the defaulting homeowner a lease on their current home. Bank of America will retain ownership, but the homeowner will get to remain in the home.
The way I see it, for this program to be successful for Bank of America, they MUST buy or form a property management company. The asset managers working for Bank of America are not property managers; they do not work with tenants, they do not oversee property turns, etc. In its current form, Bank of America will need to hire property management companies to manage the month-to-month operation of the rental homes. This costs big bucks.
The lack of a property management company reduces their return and therefore jeopardizes the success of a large-scale version of the program. If Bank of America buys a property management company or adds a property management arm to Legacy Asset Servicing (a servicing company owned by Bank of America), this would signalize their desire to unroll the program to millions of their defaulting homeowners.
The other big issue, perhaps the biggest, is Bank of America’s ability to get these homeowners to enter into lease agreements. Bank of America wants this to be a last resort; they DO NOT want to OWN and MANAGE single family homes! The program will be offered only to the homeowners who have already explored all other alternatives (modifications, principal reductions, short sales, deeds-in-lieu, etc). These are upset people; in some cases, angry people. In our line of business, I have met many of these customers. The people who have refused short sales or deeds-in-lieu are the ones who feel they have been defrauded and wronged. They have lost hundreds of thousands of dollars and do not want to be involved with the bank any further. Therefore, the only way I see this program working is if Bank of America rents to these homeowners below market.
There needs to be a true benefit to the homeowner for them to “forgive”, move on, and agree to start paying the bank rent. With a short sale, the benefit is the homeowner does not get a foreclosure on their record. To these homeowners, who have already refused to short sell, they do not care about the foreclosure. Their credit is already damaged. I think there will need to be a 10-20% discount to market for the homeowners to agree. This further digs into the returns and therefore success of the program.
This program could potentially have a huge impact on the residential real estate market. Bank of America is currently the 4th largest mortgage lender in the country. If they are successful with this pilot program, and then a larger-scale version of the same program, the other large mortgage lenders will follow suit. If that happens, this will take millions of potential REOs and Short Sales off the market.
If millions of homes enter this program, it pulls them out of the distressed resale market. The distressed sales are what are currently pulling home prices down. If these homes do not go on the market, the comps that do sell, will in theory be priced higher. This also drastically reduces the available supply of homes on the market. We already know that there are lots of buyers sitting on the sideline waiting to buy. If these homes do not hit the market, this could ultimately swing the supply-demand curve in favor of sellers. With less available properties on the market than there are buyers, prices should rise.
With millions of people being forced out of homeownership, it has created very strong rental markets across the nation. Multifamily properties have been selling fast and at low cap rates (priced high relative to the amount of profit it produces). Rents and occupancy has been on the rise. If millions of potential renters rent from the big banks instead of the current landlords, this will greatly impact rents, income-producing property values, and therefore jeopardize the loans on those properties.
It’s tough to forecast what will ultimately happen. The only thing I know for sure, is that the next 6 months to a year will play a huge role in shaping the future of distressed real estate. Pay attention to what is going on, are more banks announcing programs like this? Are banks buying or forming property management groups? Only time will tell.
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