WASHINGTON -- Investors know a good thing when they see one. That's why they are lining up in droves to get their hands on thousands of government-held problem loans and foreclosures under Uncle Sam's mortgage-to-own initiative.
The deal makes sense for the government and investors, most of them private investment funds. The government moves its bad FHA, Fannie Mae and Freddie Mac loans off its books, while investors have an opportunity to buy these assets at a deep, deep discount.
The investors will work the bad loans, trying to get people to pay. But if they can't, owners will be offered the option of staying on as renters instead of moving out. Nonpaying "guests" who haven't made a mortgage payment in months also will be offered the opportunity to remain as renters.
It's all designed to clear the "shadow" inventory that hangs over the housing market, create something of a floor for home prices and push the market back into gear. Even lenders are getting in on the act, allowing at-risk borrowers to remain as tenants as an alternative to foreclosure.
But is mortgage-to-lease a good option for consumers? As usual, it depends.
Certainly it is a more compassionate option for financially strapped owners, who can use the tool to move on with whatever dignity they have left. They can rent their homes rather than move out.
If, after a few years, they straighten out their credit records and get back on their feet financially, perhaps they can buy back their homes. If they still can't afford the place, perhaps they can find something else they can afford, or move to another rental.
But renters beware. There could be pitfalls:
-- Under what terms can you repurchase the house? It's impossible to say what the place will be worth in the future, so setting a price now is probably out of the question. But the contract needs to contain some kind of formula for determining the eventual selling price. Whether you and the landlord agree that the selling price will be a certain percentage of a future appraised value or come up with some other way to determine the price, you need to decide on the method upfront and get it in writing.
-- What are the terms of the lease? Obviously, the length of the lease is a major factor. A year may not give you enough time to get back on your feet.
Bank of America's pilot program in Arizona, Nevada and New York allows delinquent borrowers to remain in their homes up to three years. Under the more conventional House-to-Home lease-to-own program operated by Landsmith, a San Francisco-based real estate fund, tenants have six years to complete the deal.
Another key clause: Will the rent increase from year to year? If so, by how much or what percentage?
-- What kind of fees will be involved? Will you be required to put down a security deposit? Will there be an exit fee?
Also, will any part of your rent be counted toward the down payment or purchase price if you decide to buy back your place? In a typical rent-to-own program, a portion of the rent is set aside as the tenant's equity in the place. But that might not be the case in a mortgage-to-lease program, or the set-aside might be an add-on.
-- Who will manage the property? Who will be responsible for maintenance and upkeep, and who will be responsible for major repairs?
Judging by the problems some jurisdictions have had with getting lenders to maintain their REO, or real estate owned (a euphemism for foreclosures), banks have not been very good at property management.
James Breitenstein at Landsmith says that is changing. "Expertise in (property management) is coming up very quickly," he says.
But still, it's not like the houses involved in a rent-to-own program will be side-by-side in a single development. Rather, the properties will be scattered across a large geographic area, making them more expensive to run. So it may prove difficult to get a faulty water heater or broken window replaced.
-- Will the investor sell the home to another, possibly less benevolent, investor? While investors tend to buy and hold, hoping the property will increase in value, lenders who offer mortgage-to-lease programs probably will want out as soon as possible.
Once lenders "stabilize" the property with a qualified renter, they will want to cut their losses and run. So you want to make sure that any subsequent owners will be bound by the terms of your lease.
-- Will you continue to owe any part of your outstanding loan balance? In return for being allowed to remain in the house as a tenant, you will be required to sign over title to the property. It's a cleaner break than an eviction, or even simply handing the keys and deed back to the lender and moving out.
But will the investor forgive what you owed on your mortgage? How much -- all or just a portion? And under what terms will you have to pay back the rest?
"Why would anyone consider participating in a mortgage-to-lease program unless their mortgage debt was completely canceled?" says Joe Buczkowski of LeaseRunner, a Web application that combines leasing and rent collection into one paperless process.
Realize, too, that any amount of mortgage debt that is forgiven is considered taxable income by the IRS. Under the Debt Relief Act of 2007, you can exclude as income up to $2 million in canceled debt. But the exclusion expires at the end of the year, and as of now, there seems to be no appetite in Congress to extend it.
-- What is your exit strategy? If you opt to remain as a tenant, the experts agree that you should plan for the worst, just in case. Use your time as a renter to save as much money as you can. That will allow you to make a smoother transition into new digs if you have to move on or put more cash into repurchasing your home.
"Start saving now," advises Alex Matjanec of MyBankTracker.com, a consumer-centric website that brings transparency to the often clandestine banking world.