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Bank of America Reduces Mortgage Principal By Up To 30%, Starting May 2010
March 24th, 2010
Bank of America announced
that it will reduce some borrowers’ loan principal by up to 30% beginning May of
2010. To qualify, the homeowner must have missed at least 2 months of mortgage
payments and owe at least 20% more than their home is currently worth.
The plan was announced as
part of an agreement with state attorneys general in 43 states and the
The high risk loans were made
to many borrowers before Bank of America purchased Countrywide. The bank has
since discontinued making such loans.
The Program
Set to launch in May 2010,
Bank of America will initially offer to set aside a portion of the principal,
at interest-free. The principal will be forgiven if the borrower does not miss
any payments for 5 years. The principal forgiveness is set to a maximum of 30%.
The principal forgiveness
provides the homeowner the opportunity of bringing the mortgage balance back to
100% of the home’s value.
The loans under consideration
for Bank of America’s new principal reduction plan include subprime and option
adjustable rate mortgages (ARM). In order for borrowers to be eligible for
Bank of America’s program, they must also qualify for the government’s
modification plan, Home Affordable Modification Program (HAMP).
Bank of America’s move is
poised to put pressure on other banks to follow suit in reducing principal on
mortgage loans that are at risk. Bank of America is the country’s biggest bank
and one of the first major banks to embark on a systematic approach to lowering
mortgage principal for homes where prices have fallen below the amount owed.
Some industry officials who
remained to be anonymous mentioned that the Treasury Department which already
has a loan modification program may launch similar initiatives for principal
reductions at other mortgage servicers. An announcement of this new initiative
may come in a few months.
According to Bank of America,
an estimated 45,000 borrowers will qualify for reductions in mortgage
principal. The proposed offer is intended to shave off about $3 billion worth
of principal reductions.
Other Major Banks
Wells Fargo has modified more
than 52,000 adjustable rate mortgages that it inherited from purchasing
Wachovia Corp. in 2008. As of late 2009, Wells Fargo has reduced principal for
the aforementioned loans by at least $2.6 billion.
Citigroup did not mention of
a similar plan but issued a statement indicating that the bank does consider
reducing principal for loans on a case-by-case basis once all options have been
exhausted.
JPMorgan Chase declined to
comment on whether they were launching similar initiatives of principal
reductions.
Underlying Risks To The Plan
The plan may backfire on Bank
of America should borrowers who aren’t 60 days delinquent decide to stop making
mortgage payments so as to qualify for the plan benefits. The more people attempting
to deliberately qualify will cause Bank of America to incur more losses. In
addition, the bank will also bear all costs in renegotiating the loans.
Despite the odds, Bank of
America’s new plan will help to prod other banks to adopt similar programs in
principal reduction and in the long run prevent home prices from falling
further. The principal reduction plan will also help Bank of America to
minimize extensive long-term losses as it is a cheaper alternative to having
borrowers walk away from their homes or agreeing to a short-sale.
Comments
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