Bank of America mortgage borrowers in threat of foreclosure will be getting some relief from the banking giant starting in May.
In a statement released today from the largest mortgage servicer in the country it said it will forgive up to 30 percent of some their customers' total mortgage balances. The troubled borrowers must be at least two months behind on their mortgage payments and owe at least 20 percent more than what their home is currently worth.
Many of these "high-risk loans" were made by Countrywide Financial Corporation before Bank of America acquired them in mid-2008 and since then Bank of America has stopped making those types of loans.
This move by Bank of America is a way to resolve some of their legal problems, but what's interesting is that this type of relief program could be setting a precedent for other banks to also start similar mortgage principal forgiveness on their loans that are in danger of failing.
Bank of America is the first big bank to take a systematic approach to reducing mortgage principal when home values drop well below the amount owed.
Already with a mortgage modification program of their own, The Treasury Department is developing similar plans for principal reductions at other mortgage servicers which could come in the next few months.
Julia Gordon, senior policy counsel at the Center for Responsible Lending, a consumer group, said of Treasury officials, "They're talking about doing something and talking seriously about it. I think the concern now is fairness and making sure that the public understands the importance of principal reductions toward stabilizing the housing market and helping everybody."
JPMorgan Chase, Citigroup, and Wells Fargo have not commented on whether they are planning similar programs.
Just this week, the government reported that new home sales dropped to a record low last month, and the National Association of Realtors reported sales previously occupied homes also fell in February which is the third straight monthly decline. Therefore, Bank of America's plan comes with good timing.
Since the housing market collapsed in late 2007, millions of homes have gone into foreclosure. The troubled borrowers who want to take advantage of the Bank of America program must also qualify for the Obama administration's $75 billion mortgage loan modification program which is about 45,000 of their customers.
It's not clear how much of a financial hit Bank of America will take by reducing these mortgages, it's estimated to be about $3 billion, but the move will likely be less costly than having homeowners do a short sale or simply walk out on their mortgages altogether. However, is this the easiest way out of bad debt by Bank of America?
BofA's plan does carry a lot of risk. One risk is borrowers who are not 60 days behind on their mortgages may suddenly stop making payments on their mortgages in order for them to qualify. However, the more borrowers who try this tactic to qualify, Bank of America could be at risk for an even larger potential loss. Furthermore, Bank of America will also have to soak up the costs of renegotiating the loans.
The good news is that this plan helps create the best chance of avoiding a further downward spiral on home prices, which could have resulted in even deeper losses.
Starting in May, Bank of America's first offer will be to set aside a portion of the principal balance, interest free, and that part of the principal can be forgiven over five years as long as the homeowners don't miss any additional payments. The maximum decrease in the mortgage principal will be 30 percent. This forgiveness will allow homeowners to bring their mortgage balances back down to 100 percent of the home's value.
Bank of America, as well as many other lenders, has been criticized for not helping borrowers enough to complete the Obama administration's $75 billion mortgage modification program, with only 170,000 homeowners completing the program to date.
By the end of February, Bank of America had only completed modifications for about 22,000 homeowners, which is about 8 percent of those signed up.
The Treasury Department estimates that 1.5 million to 2 million homeowners will complete the Obama program by the end of 2012, which is close to half of the plans original goal.