Bank of America hopes underwater homeowners become renters to avoid foreclosure

Bank of America is sending proposals later this month to upward of 1,000 customers in Arizona, New York and Nevada. If the reaction is positive, the program is likely to be expanded to other states, and it could become a model for the biggest players in the mortgage market, Fannie Mae and Freddie Mac.

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The plan has clear benefits for Bank of America. Since foreclosures generally trigger deeper losses to lenders than deeds-in-lieu of foreclosure, the bank gets back troubled properties at lower costs. Since it intends to sell those houses to investment groups as rentals with income-qualified tenants already living on the premises, the bank expects to obtain overall higher returns than it would by selling them as vacant, post-foreclosure units.