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Reuters: Bank of America to Offer Principal Reduction to Underwater Borrowers

by devteam March 24th, 2010 | Share

Reuters is reporting that Bank of America will soon beginrnoffering loan modifications based on a reduction of the mortgage principal tornsome of its borrowers.  The plan will bernextended to troubled borrowers who are holding mortgages with principalrnbalances of 120 percent or more of the home's market value or who arernconfronted with endlessly increasing balances on negative amortization loans.

Under the plan BOA will forgive up to 30 percent of the mortgagernloan balance in two stages, but with a quid pro quo from the homeowner.  The bank will offer an interest-freernforbearance of up to 30 percent of the principal balance for five years.  If the homeowner stays current on mortgagernpayments for the period of time, then the amount will be forgiven.  On paper, at least, that forgiveness willrnallow the homeowner to return his loan to an LTV of 100 percent.

Homeowners who have payment option mortgages will also be helpedrnunder the new plan.  Under option paymentrnmortgages, borrowers can choose to pay less than the interest due in a givenrnmonth with the unpaid amount added to principal.  When the principal has mushroomed to an amount,rnusually around 110 percent loan to value, the loan converts to fully amortizingrnpayment.  This often throws the borrowerrninto almost immediate delinquency. Under the plan Bank of America will cut thernprincipal balance on these loans to as little as 95 percent of the property'srncurrent value.

Other proposed changes include possible payment reductionsrnon some prime hybrid adjustable rate mortgages and continuation of the bank's NationalrnHomeowner Retention Plan through the end of 2012, an extension of six months.

Bank of America is among the servicers who have beenrncriticized for their performance under the Making Home Affordable Programrn(HAMP).  As of the end of February, thernTreasury Department reported that the bank was servicing 1.09 million mortgagernloans that were 60+ days delinquent.  Ofrnthose, 240,550 or about 24 percent had been placed in a trial program and lessrnthan 10 percent of those, 20,666 had been converted to permanent modificationrnstatus.  While Bank of America is by farrnthe largest servicer of delinquent mortgages participating in the HAMP program,rnits achievements rank well below other major participants such as J.P.rnMorgan/Chase and Citi which had enrolled borrowers at rates of 39 percent andrn52 percent respectively. HAMP depends heavily on reducing interest rates tornmeet program goals.  Only 27.8 percent ofrnthe modified mortgages have received any reduction of principal.

Reuters said it expected the announcement of Bank ofrnAmerican's new initiative to be released Wednesday.  On Tuesday Bank of America was sued in U.S.rnDistrict Court in the Western District of Washington by two Seattle residentsrnwho allege that the Bank has “strung out, delayed, and otherwise hinderedrnthe modification processes” because it has a financial incentive to do so.

The plaintiffs in the suit, Kahlo v. Bank of America, arernseeking class-action status for their suit. rnThey maintain that the bank's participation in HAMP was mandated by thernTreasury Department because the bank had accepted funds from the Troubled AssetrnRelief Program.  However, the suitrnalleges that the bank is not modifying loans because to do so would require itrnto repurchase more loans and it would make less money from late charges andrnservicing fees if it had fewer delinquent loans.  The bank's activity, according to the plaintiffs,rnhad left thousands of borrowers worse off than before they began thernmodification program.

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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