The ATA’s Rent-To-Own Initiative

The balance sheets of U.S. banks are suffering under the weight of more than 1.5 million home mortgages that are seriously delinquent or in foreclosure. According to the Mortgage Bankers Association, this represents more than 11% of all residential mortgages. According to one recent study that applied Black-Scholes financial modeling techniques to the total inventory of U.S. residential mortgages, the value of troubled residential mortgages approaches $3.6 trillion.

As real estate values continue to fall due to the general economy, as banks tighten up mortgage underwriting requirements and as millions of adjustable rate mortgages come up for rate renewal, the number and value of mortgages heading for trouble will continue to rise.

The American Tenants Association, as a solution to the problem, has proposed a Performance Based Financing rent-to-own initiative. Designed to offer tenants the opportunity to become homeowners under special leases, our proposals also serve as a way for banks to relieve their books of troubled assets. By increasing home buying demand everyone benefits: tenants, banks, the nation and communities who will witness a stop to declining home values.

The ATA’s proposal will require a collaborative effort from among all interested parties. This includes financial institutions, the real estate community, governments at all levels and the ATA.

Performance Based Financing will work by allowing tenants, through the ATA and similar organizations, to rent foreclosed homes at a discounted net present value from participating banks, as well as Freddie Mac and Fannie Mae. The ATA and similar groups will educate potential renters of the advantages and benefits of the program, manage the program at the local level and provide community outreach efforts.

The methodology would be to use net present value and future financial value modeling to establish fair agreement for each individual property such that the properties’ value can be fixed at today’s measure. Using the derived modeling specific to each property, an individually tailored plan for Performance Based Financing can be put into place. Each completed rent-to-buy contract will resurrect the asset on the bank’s balance sheet, strengthen the community, and provide the opportunity for the renter to achieve home ownership. The ATA envisions programs of three, five, seven or ten years that will lead to closing and permanent financing. Rental payments, or a significant portion thereof, will be applied toward the prior agreed upon purchase price.

We will keep you informed of our implementation progress.