Bank of America announced a new plan to cut the principal on loan balances by up to 30% for certain borrowers. My first reaction was, what took them so long? Housing economists say principal reduction is the quickest way out of the foreclosure crisis, but banks have been unwilling to realize their losses and have thus far been operating on the "extend and pretend" theory, meaning that they string along underwater homeowners and pretend that the loans on their books will be fully paid.
I discussed the details of the plan with Harry Smith on The Early Show this morning.
We know that the bank didn't make this move out of the goodness of its heart-it was prompted to act before Massachusetts AG Martha Coakley could file a predatory lawsuit against BofA's Countrywide unit (BofA bought the flamed-out - lender in 2008). And maybe it was also an acknowledgment that action was necessary to stave off the increasing practice of strategic foreclosure.
I don't care about the motive behind the decision-this is a good thing for all of us. Just yesterday, SIGTARP Neil Barofsky said that the Administration's HAMP was failing in its mission. As a result, too many homeowners have found themselves in what MoneyWatch blogger Ilyce Glink calls "loan modification hell". Remember, even if you are a responsible homeowner, you don't want your neighbor's house to go into foreclosure, regardless of whether his plight is due to bad luck or bad decisions. Foreclosures depress home values and are bad for all of us!
Hopefully, this will be the start of a larger trend, but we still have to deal with those second-lien holders...but that's a post for another day.
Here are some of the details of the BofA program:
- Invitation only: don't call your local BofA banker and expect him to lop off tens of thousands of dollars from the loan-the bank will contact you if you qualify
- The program is for Countrywide borrowers
- Loan balance must be at least 120% of the estimated home value
- Borrower must be at least 60 days overdue
- Borrower must demonstrate financial hardship
Only the riskiest loans are eligible program-that includes:
- Sub-prime loans
- "Option adjustable-rate" -- the ones with low teaser payments that adjust higher
- Some loans that have a fixed rate for two years and then adjust annually
The bank estimates that 45,000 customers only will qualify (BofA currently holds 1.2 million loans that are in default) for principal reductions that will average approximately $60,000.
