In the world of banking the thought of reducing a failing mortgage’s principal has up till this point been unheard of. Bank of America recently issued a statement that they have designed a program to address certain mortgages within their holdings with principal reductions.
The inclusion of this financial taboo was part of a settlement between states attorney generals to address charges that the recently acquired Country Wide Financial Corp. made high risk loans. Country Wide Financial Corp was acquired by Bank of America in 2008. Since the acquisition of Country Wide Financial Corp. Bank of America has ceased its high risk lending practices.
To qualify for a principal reduction borrowers must comply with certain guidelines set by Bank of America. To be considered a borrower must be at least two months behind on their monthly mortgage payments, and the borrower’s home must be valued at least 20% below what the remaining balance on the loan is. Once a borrower is approved to enter the program, Bank of America has stated that they will consider reducing the principal of the existing loan up to 30%. Applicants must also qualify for the federal loan modification program to receive the reduction.
The benefit to the borrower is that their loan will be reset to match the value of the home. Bank of America estimates that there are approximately 45,000 clients that will qualify for the program. Bank of America has not released information estimating the cost the program, but it is figured to be in the millions. This is tangible money that struggling borrowers will save over the life of the loan. The cost of the program is expected to be recouped through fewer foreclosures.
The move by Bank of America to reduce principals is the first of its kind. J.P. Morgan/Chase, Citigroup Inc., and Wells Fargo have declined to comment if they are considering mirroring Bank of America’s program. The fact that Bank of America breached the “principal reduction” taboo is a hopeful sign that other financial giants may consider adopting similar programs. Unofficial comments by representatives of some of the countries lending giants are not so optimistic. Most of these representatives agree that Bank of America’s maneuver was a legal consideration made to resolve further actions. The likelihood that other lenders will participate in principal reductions at this time is rather unlikely.
Principal reduction is not the answer to foreclosure. Many of these homeowners will be in trouble again in 9 months. Let the market decide the outcome. I prefer doing a short sale if it can be done in a reasonable period of time. 90 days would be appropriate.