Bank of America Corp said on Thursday it was launching a pilot program that will allow homeowners facing foreclosure an opportunity to remain in their homes while transitioning to tenant status.

Under the pilot program known as Mortgage to Lease, participants will transfer their property titles to the bank and have their outstanding mortgage debt forgiven, Bank of America said.

Fewer than 1,000 customers will be invited to participate in the first phase of the pilot and the bank said it has started selecting customers in test markets in Arizona, Nevada and New York -- three states hit hard in the housing downturn.

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, Bank of America executive Ron Sturzenegger said.

In February, five big U.S. banks accused of abusive mortgage practices had agreed to a $25 billion (15 billion pounds) government settlement that may help roughly one million borrowers but is no magic bullet for the ailing housing market .

Bank of America, which had the largest exposure to the settlement due to its 2008 purchase of the troubled subprime lender Countrywide Financial, earlier agreed to offer deeper cuts for its underwater borrowers.

(Reporting By Matt Daily and Sakthi Prasad; Editing by Edmund Klamann and Jonathan Hopfner)