There is news on the Principal Reduction arena – but it is not as good as it first sounded. Limited application – but it is a start….
Bank of America to Cut More Loan Balances
Bank of America Corp. said it would offer more borrowers reductions in their mortgage-loan balances in the latest twist on efforts to avert foreclosures.
The plan is the mortgage industry’s boldest move yet to address the plight of the millions of U.S. homeowners who are “underwater,” owing more than the current values of their homes. It enhances an agreement Bank of America reached 18 months ago with state attorneys general to settle claims they made over certain high-risk loans made by Countrywide Financial before Bank of America acquired that lender in mid-2008.
Reductions of as much as 30% in loan principal will be offered to struggling borrowers who have subprime or so-called option adjustable-rate mortgages, known as option ARMs. (Option ARMs, no longer available, allow borrowers to start with minimal monthly payments and face steep increases later.) Also included will be certain loans that have a fixed interest rate for the first two years before starting to adjust annually.
The program is limited to Bank of America customers who are at least 60 days overdue on payments, who can demonstrate that a financial hardship prevents them from making payments at the current level, and whose loan balance is at least 120% of the estimated home value. The bank estimated that 45,000 customers will qualify for the relief.
Amid the worst wave of foreclosures since the 1930s, banks generally have been reluctant to reduce principal. Instead, most loan modifications—including those under the government-subsidized Home Affordable Modification Program—involve reducing interest rates to as low as 2%. Some also extend loan terms to 40 years to shrink monthly payments.
But banks are finding that many deeply underwater borrowers aren’t willing to keep making even reduced payments because they believe they have little hope of ever having equity in their homes and would be better off renting and perhaps buying a cheaper home later. The Bank of America program is aimed to give such borrowers more hope by reducing their loan balances to current estimated home values.
Bank of America said the program might eventually be extended to other types of loans. The U.S. Treasury, which runs the HAMP loan-modification program, also has been considering ways to encourage more principal reduction but has indicated that any such steps were likely to be modest.
Under the Bank of America plan, the maximum decrease in principal will be 30%, and borrowers will have to “earn” the lower balances in stages over five years by keeping up on their new, lowered payments.
By cutting principal, Bank of America said, it will reduce the risk that these borrowers will default again later. “We believe this could become an industry model for principal forgiveness,” the bank said.
The program also addresses the woes of option ARM borrowers whose loan balances have increased over the years because they made minimal payments that deferred part of their interest due. Some of these borrowers will qualify for a reduction in their principal to as low as 95% of the home value.
To determine the market value of a home under the program, Bank of America plans to use computer models that estimate those values or, in some cases, opinions from real-estate brokers. Those estimated values will then be adjusted annually using metropolitan-area price indexes, Bank of America officials said.
First American CoreLogic, a real-estate data provider, has estimated that 11.3 million U.S. households, or 24% of those with mortgages, were underwater at the end of 2009.