It’s as if the brains that run Bank of America awoke one morning and realized that several hundred thousand mom-and-pop investors were making good money on the very assets on which they had lost billions. After losing thousands of on every mortgage that went bad, then foreclosing and losing even more in carrying, maintenance and repair costs, banks have ended up selling what was left at serious discounts to buyers willing to pay cash for an additional discount.
Maybe the little guys have a lesson to teach: Buy ‘em for a song, fix ‘em up and rent ‘em out until times get better. Then sell ‘em at full-price. Since B of A already owns the properties and has a tenant in place, what could be simpler?
The event that sparked this Eureka moment in Charlotte was not the explosive growth of distress sale purchases by individual investors in recent years. It was the realization that the release into hundreds of local markets of B of A’s share of the 1.6 million property shadow inventory backlogged by robo-signing mess and soon-to-be freed by the multi-state AG agreement, coupled with expedited processing new defaulting properties is going to produce even greater losses for B of A’s shareholders. That’s because the odds are pretty good that the leading lenders will be not able to parcel out the backlog without wreaking havoc in America’s fragile, stabilizing markets. With more REOs to sell than most, B of A would be one of the biggest losers when markets tank. So it seems that the decision to go into property management was most likely born not of invention but necessity.
Nor was the decision a surprise. Following the launch of FHFA’s pilot program to sell foreclosed Fannie and Freddie properties in bulk for investor to rent out, many have assumed that major private servicers would do the same as a way to avoid multi-market price implosion. The idea of turning defaulting owners into renters in place is also not new, but an interesting twist based on the success individual investors have achieved and qualifies the biggest bank in the nation for Bigger Pockets membership.
However, the fine print makes clear how limited the pilot will be. Homeowners won’t have a say in whether they get to participate in the program. Participants will be preselected to “transition to tenant status.” Fewer than 1,000 customers will be invited to participate in the first phase of the pilot. Initial outreach has begun to preselected customers in test markets in Arizona, Nevada and New York.
Among the prospective participants must:
- Be delinquent for more than 60 days.
- Have exhausted modification solutions or have not responded to alternatives to foreclosure, including short sale and deed-in-lieu.
- Have high loan balances in relation to their current property value.
- Face considerable risk of ultimate foreclosure.
- Have no junior liens.
- Still occupy the home.
- Have adequate income to make an affordable rent payment.
In its announcement, Bank of America raised as many questions as it answered, escpeially regarding its future intentions. “Our priority is designing a solution that helps our customer,” said Ron Sturzenegger, Legacy Asset Servicing executive of Bank of America, in the company’s press release. “If this evolves from a pilot into a more broadly based program, we also see potential benefits from helping to stabilize housing prices in the surrounding community and curtail neighborhood blight by keeping a portion of distressed properties off the market.”
How will tenants, properties and neighborhoods be selected? What happens when a tenant defaults on a lease or moves? Will the property be re-let or sold? What criteria will determine when the property will be sold? Is a lease-purchase option in the offing? Will other lenders follow the leader’s lead and soon will a significant portion of the shadow inventory be under lease?
Finally, is this a temporary, stop gap plan to manage the release of B of A’s backlogged inventory or is it a prospective new venture and profit center? Or with its tremendous advantages in access to capital, personnel, economies of scale and insider marketplace intelligence, is Bank of America willing and able to compete with individual investors; take similar risks; control costs; rehab, maintain and manage properties and move as nimbly as they do to adjust to changing markets?
Time will tell.