Bank of America (BAC) has a new plan to help struggling homeowners. The company announced Thursday it has invited about 1,000 consumers from Nevada, Arizona and New York to participate in its new pilot program which allows homeowners on the verge of foreclosure to remain in their homes.
The pilot program works like this: homeowners would give the title of their homes to Bank of America in exchange for mortgage debt forgiveness. Homeowners would then have the opportunity to rent their home from the bank at a cost that was less than their mortgage payment.
Bank of America's pilot program, known as Mortgage to Lease, is the latest initiative attempting to stem the wave of foreclosures and boost the weak housing market.
Stan Humphries, an economist at Zillow, estimates 11 million to 14 million Americans are currently underwater on their mortgages. All of those mortgages add up to a staggering $750 billion that banks would have to write off on their balance sheets.
Humphries says Bank of America's program has good intentions but notes that "there's no silver bullet policy that really can fix this problem in a single stroke."
"The fundamental problem affecting the housing market is negative equity," he says in the accompanying video. "It's a $750 billion problem and it's hard to get rid of."
New policies have been created to assist homeowners facing foreclosure. Mortgage lenders and servicers are lengthening the payment schedule for homeowners, lowering the mortgage rate or reducing the principal owned on the home.
Bank of America will not be accepting applications or volunteers for its program. The bank will determine which homeowners it wants to participate in its program. Only homeowners with a Bank of America mortgage and who have been delinquent on their payments for more than 60 days are eligible. The bank says it will keep ownership of the homes before selling them to outside investors.
This pilot program is "a good thing because rental supply is pretty tight now and these homeowners "have to live somewhere," Humphries says.
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