WASHINGTON (AP) -- Bank of America has launched a pilot program that will let some homeowners at risk of foreclosure become renters and stay in their homes.
Fewer than 1,000 borrowers in Arizona, Nevada and New York will be enrolled in the test program, which began this week. Those selected will transfer the title of their homes back to Bank of America and have their mortgage debt forgiven.
The homeowners can rent the homes for up to three years at or below their area's market rental rate. The rental payments will be less than the borrowers' mortgage payments, the bank said. And they will not have to pay property taxes or homeowner's insurance.
The program, called "Mortgage to Lease," uses an old but increasingly popular technique for lenders. It's called a "deed in lieu of foreclosure." It occurs when homeowners turn over the deed to their house to their lender because they can't make the monthly payments.
The technique was used during the Great Depression but fell out of favor after the 1930s.
The trick will be to find homeowners who are struggling with bloated mortgage payments but who have enough steady income to safely make smaller rental payments.
Foreclosures can be pricey and time-consuming for lenders, which have been seeking alternative ways to cut costs. The average foreclosure takes nearly two years to complete, according to Florida-based Lender Processing Services, and costs nearly $78,000, according to a Congressional estimate.
Bank of America says it's targeting homeowners who are at "considerable risk" of foreclosure; have high loan balances relative to their home's value; have exhausted all loan modification programs; and have been delinquent on their mortgage payments for more than 60 days.
"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," said Ron Sturzenegger, a Bank of America executive.
Charlotte, N.C.-based Bank of America, the nation's second-largest bank, said it will eventually sell the homes to investors. If successful, the program could be expanded to include real-estate investors who buy homes at risk of foreclosure and keep the homeowners as tenants.
Foreclosures surged in February across half of U.S. states, according to RealtyTrac, which follows foreclosure filings. Banks are wrestling with a backlog of homes with mortgages that had gone unpaid yet remained in limbo because of delays involving a government probe into foreclosure abuses.
That investigation ended last month with a landmark $25 billion settlement among states, the federal government and the nation's five biggest mortgage lenders.
Nevada has the nation's highest foreclosure rate as of February: One in every 278 households in the state had received a foreclosure-related filing, twice the national average, according to RealtyTrac.
Arizona ranks third behind California. New York has not been as hard hit, with one in every 4,604 households receiving a foreclosure-related filing.