BofA to try converting foreclosures into rentals

Bank of America Corp. has tentatively joined a nascent housing industry movement in which homes in or near foreclosure are sold to investors as rental properties.

The bank on Friday began a test program for 1,000 homeowners headed into foreclosure in Nevada, Arizona and upstate New York — borrowers it has been unable to help with loan modifications but hopes to keep on as renters. If successful, the program could be tried in California and rolled out nationally.

Consumer advocates maintain it often would be better for homeowners, communities and the banks themselves to keep troubled borrowers on as renters rather than kick them out. Seizing and selling empty homes creates neighborhood blight and accelerates downdrafts in housing prices, they contend.

Bank of America doesn’t plan to become a longtime landlord for borrowers turned tenants. In the pilot, it hopes to take possession of homes for no more than three months before selling them to investors making a bet on the recovering housing markets. If the program becomes established, the goal would be for the investors to take over as soon as the occupants relinquish ownership and pay the first month’s rent.

Whether this scheme can work is to be determined by the pilot, the first such test announced by any major mortgage company. The bank wants to find out whether getting a loan off its books with a quick sale at a deep discount is a better deal financially than the foreclosure process, which can drag on for months or even years in highly regulated states such as New York.

“This pilot will help determine whether conversion from homeownership to rental is something our customers, the community and investors will support,” said Bank of America’s Ron Sturzenegger, who oversees about 1 million troubled loans inherited from aggressive mortgage giant Countrywide Financial Corp., which Bank of America purchased in 2008.

Homeowners can’t apply for the program themselves, a bank spokesman said.

The trial is limited to a tiny slice of the 1 million loans that Bank of America owns outright. It is not testing any of the additional 8 million home loans on which it provides customer service but which are owned by investors in mortgage bonds.

Bank of America executives said the 1,000 homeowners selected are all at least 60 days late on their loans and are not qualified for or not willing to accept other alternatives to foreclosure.

They will be offered one final deal: hand their property titles to the bank, which would cancel their mortgages in what’s known as a deed in lieu of foreclosure, and sign contracts agreeing to rent the home for up to three years at or below market rates.

Bank of America spokesman Dan B. Frahm said there are hundreds of investment groups across the country interested in acquiring troubled properties as rentals, each eyeing different regions and segments of the housing markets.

The pilot is designed to test the market for homes ranging in current value from $75,000 to $1 million, and to assess the program’s viability in states such as New York that route foreclosures through the courts, as well as states that do not, such as California, Arizona and Nevada.

Initial interest in the pilot program is likely to be strong. Betting that the housing markets are bottoming out, hedge funds, private investors and even Omaha investment wizard Warren Buffett have expressed interest in snapping up distressed or foreclosed properties to rent out or sell to first-time buyers.

Indeed, some investment firms have been turning distressed properties into rental units for years.

TwinRock Partners, a private Newport Beach firm, recently told potential investors that more than 100 homes it has acquired and rented out over the last two years have produced annualized returns of 8.7%, with the potential for big resale profits if housing prices recover. TwinRock says it tries to keep the occupants in the house as renters and has done so about half the time.

The Obama administration has said it hopes investors will buy many of the nearly 250,000 foreclosed homes owned by government-controlled entities and turn them into rentals, although the former owners of these homes already have been given the boot.

scott.reckard@latimes.com