Bank of America to Start Reducing Mortgage Principal
March 24, 2010 - 3:28 PMBank of America Corp. is giving some of its most troubled mortgage borrowers relief from the threat of foreclosure.
The bank, the largest mortgage servicer in the country, said Wednesday it will forgive up to 30 percent of some customers' total mortgage balance. The homeowners must be at least 60 days delinquent on their loans and owe more than 120 percent of their homes' value.
The plan is part of an agreement the Charlotte, N.C.-based bank reached 18 months ago with state attorneys general to settle charges over high-risk loans made by Countrywide Financial Corp. The loans were made before Bank of America acquired the mortgage lender in mid-2008. Bank of America has since stopped making those loans.
Although the motivation for Bank of America's announcement was to resolve legal problems, it has the potential of setting a precedent for other banks to also start forgiving principal on loans that are in danger of failing. Bank of America is the nation's largest bank, and it's among the first to take a systematic approach to reducing mortgage principal when home values drop well below the amount owed.
Millions of homes have gone into foreclosure since the housing market collapsed in late 2007. The loans affected by Bank of America's announcement include certain subprime and option adjustable rate mortgages. Option ARMs allow borrowers to start with minimal monthly payments that actually increase the loan's balance.
The borrowers who can take advantage of the Bank of America program must also qualify for the Obama administration's $75 billion mortgage loan modification program.
Bank of America estimates that about 45,000 customers will qualify for its plan.
The offer will cut total reduced principal by about $3 billion. That could lower the bank's earnings, which have already been hurt by consumers' continuing defaults on mortgage and credit card loans. Bank of America was among the hardest hit by the credit crisis and recession.
Even so, "the move helps create the best prospect of avoiding a further downward home price spiral, which would result in even deeper losses" for the bank, said Howard Glaser, a mortgage industry consultant, in an e-mail.
Investors appeared pleased with the news, sending Bank of America shares up 36 cents, or 2.1 percent, to $17.49 in afternoon trading.
According to new plan, which begins in May, Bank of America will first offer to set aside a portion of the principal balance, interest free. That principal can be forgiven over five years, if homeowners don't miss any payments. The maximum decrease in principal will be 30 percent.
The forgiveness allows a homeowner to bring a mortgage balance back down to 100 percent of the home's value, the bank said.
Glaser said the program could lead the Obama administration to launch a similar effort for the entire industry. That, he wrote, would be a "major shift in loan modification efforts."
Lenders including Bank of America have been criticized for not helping enough borrowers to complete the Obama administration's $75 billion loan modification program, which is widely viewed as a disappointment. Only 170,000 homeowners have completed the program so far.
As of last month, Bank of America had completed modifications for about 22,000 homeowners, or about 8 percent of those signed up. That compares with about 12 percent for Wells Fargo & Co. and 11 percent for both JPMorgan Chase & Co. and Citigroup Inc.
The Treasury Department estimates that 1.5 million to 2 million homeowners will complete the program by the end of 2012, about half of the original goal. A report issued late Tuesday by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, says numerous changes to government guidelines "caused confusion and delay" and said the government did not do enough to advertise the program.
AP Real Estate Writer Alan Zibel in Washington, D.C., contributed to this report.
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