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Bank of America offers loan help

CHARLOTTE, N.C. — Bank of America is giving some of its most troubled mortgage borrowers relief from the threat of foreclosure.

The bank, the largest mortgage servicer in the country, said Wednesday it will forgive up to 30 percent of some customers' total mortgage balances. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth.

The plan is the newest provision of an agreement the bank reached 18 months ago with state attorneys general to settle charges over high-risk loans made by Countrywide Financial Corp. before Bank of America acquired the mortgage lender in mid 2008. The bank has since stopped making those loans.

Although the motivation for Bank of America's announcement was to resolve legal problems, it has the potential of putting pressure on other banks to also forgive principal on loans that are in danger of failing.

Some banks said they have already reduced principal on some mortgages. Wells Fargo & Co. said Wednesday it has modified more than 52,000 adjustable-rate mortgages that it inherited through its acquisition of Wachovia Corp. in late 2008. As of the fourth quarter, the bank also had reduced the principal on those mortgages by more than $2.6 billion.

Citigroup Inc. would not say whether it planned a similar program, but it did issue a statement that said in part, "Citi does reduce principal for borrowers on a case-by-case basis after other options to address affordability are exhausted."

A spokeswoman from JPMorgan Chase & Co. declined to comment on whether it planned a similar program.

Bank of America estimates that about 45,000 customers will qualify for its plan, which begins in May. The offer will cut total reduced principal by about $3 billion.

It's not clear how big a financial hit Bank of America will take by reducing mortgages. But the move will likely be less costly than having homeowners walk out on their mortgages or opt to do a short sale, banking analyst Bert Ely said, referring to when a seller owes more than the house is worth and the lender is willing to accept less than the mortgage balance.

"This is about loss minimization," Ely said. "There's going to be losses (for Bank of America). The question is what's the easiest way out."

The plan does carry risks. For starters, borrowers who aren't 60 days behind on their mortgages may stop making payments so they can qualify. The more borrowers who try to qualify, the bigger the potential loss for Bank of America. The bank will also have to absorb the costs of renegotiating the loans.

According to the new plan, Bank of America will first offer to set aside a portion of the principal balance, interest free. That principal can be forgiven over five years, if homeowners don't miss any payments. The maximum decrease in principal will be 30 percent.

The forgiveness allows a home­owner to bring a mortgage balance back down to 100 percent of the home's value, the bank said.

'Disappointing' results

The Obama administration's main foreclosure-prevention program risks helping few borrowers and may do more harm than good by "merely spreading out the foreclosure crisis" over several years, federal investigators said. "A year into the program, although more than a million trial modifications have been initiated, the number of permanent modifications thus far, 168,708, has been, even according to the Treasury, 'disappointing,' " according to a report by a government watchdog. While Treasury officials still publicly proclaim the Home Affordable Modification Program will help 3 million to 4 million borrowers, internally they project that about half that number will receive permanent alterations, the special inspector general for the Troubled Asset Relief Program wrote in the report.

Bloomberg News

Bank of America offers loan help 03/24/10 [Last modified: Thursday, March 25, 2010 7:28am]
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