For struggling homeowners, it was a blockbuster. Bank of America on Wednesday announced a new program aimed at reducing mortgage principal for homeowners that owe more than 120 percent of their home's value. Yes, you heard right: The bank will actually reduce principal owed for underwater borrowers and those with so-called negative amortization loans. That's long been viewed as the Holy Grail for helping underwater homeowners, but banks have been reluctant to do more than lower interest payments. The initiative, according to BofA, would aim to bring loan values back down to 100 percent of the home's value over five years.
The BofA announcement marks a startling shift for the beleaguered bank, which has been dogged by complaints that it has been unresponsive to homeowners looking for help with mortgages they can no longer afford. The bank has also been stung by a string of embarrassing incidents where it has wrongfully seized homes for foreclosure.
Indeed, a lawsuit filed by homeowners in Washington on Tuesday charges that BofA "systematically slows or thwarts access to Troubled Asset Relief Program (TARP) funds by ignoring homeowners' requests to make reasonable mortgage adjustments or other alternative solutions that would prevent homes from being foreclosed," according to a press release announcing the suit.
Nothing like a good lawsuit to bring about radical change!
Whatever the motive, this is a very significant development that, if other major lenders follow, could actually help nurse the critically ill real estate market back to health -- not to mention provide relief to thousands of homeowners.
The lawsuit points out that Bank of America services more than 1 million mortgages that qualify for financial relief under the government's Making Home Affordable program (HAMP) loan modification program, but so far has granted permanent modifications to fewer than 13,000.
Still, as we all know by now, HAMP has been less than a smashing success. HousingWatch has written often that the only real hope for a full recovery of the housing market would be to reduce the principal of some mortgages -- not just interest payments, which tend to simply put off foreclosure to a date not too far down the road.
Banks lobbied strongly for Congress to abandon any plans to change bankruptcy laws to allow judges the flexibility to reduce principal on primary homes during bankruptcy proceedings -- a process known as a cramdown.
Perhaps sensing that with the passage of health care reform and efforts to bring about meaningful change in banking regulations, Bank of America is apparently taking this initiative to, in my view, head off any future attempts to change the bankruptcy laws. This way, the bank gets to decide who gets a principal reduction and not some federal judge.
The BofA program will offer an "earned principal forgiveness" up to 30 percent in two stages. The program will be offered to borrowers of certain subprime, Pay-Option and prime two-year hybrid mortgages that qualify for BofA's National Homeownership Retention Program (NHRP), created in 2008, and are at least 60 days delinquent with current loan-to-value (LTV) ratios of 120 percent or higher.
According to Bank of America, the program entails:
- An interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years resulting in a maximum 30 percent decrease in the loan principal balance to as low as 100 percent LTV.
- In each of the first five years, up to 20 percent of the forborne amount will be forgiven annually for borrowers that remain in good standing on their mortgage payments.
- Forgiveness installments for the first three years are set at the 20 percent level.
- In the fourth and fifth years, the amount of forgiveness will be dependent upon the updated value of the property, so that the LTV will not be reduced below 100 percent through principal forgiveness.
The program is expected to be operational by May. Talk about green shoots!
Charles Feldman is a journalist, media consultant and co-author of the book, "No Time to Think: The Menace of Media Speed and the 24-hour News Cycle." He has written about real estate related issues for several years.
