Bank of America planning more principal reductions to qualified homeowners

Bank of America will offer more borrowers reductions in their mortgage-loan balances in the latest efforts to prevent foreclosures

BofA’s plan for more principal write-downs enhances an agreement Bank of America reached 18 months ago with state attorneys general to settle claims they made over certain high-risk loans made by Countrywide Financial before Bank of America acquired that lender in mid-2008.

Principal reductions up to 30-percent on ARMS and 2-yr fixed loans

Reductions of as much as 30% in loan principal will be offered to struggling borrowers who have subprime or so-called option adjustable-rate mortgages, known as option ARMs. Also included will be certain loans that have a fixed interest rate for the first two years before starting to adjust annually.

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Under the Bank of America plan, the maximum decrease in principal will be 30%, and borrowers will have to “earn” the lower balances in stages over five years by keeping up on their new, lowered payments.

The program is limited to Bank of America customers who are at least 60 days overdue on payments, who can demonstrate that a financial hardship prevents them from making payments at the current level, and whose loan balance is at least 120% of the estimated home value. The bank estimated that 45,000 customers will qualify for the relief.

What’s motivating BofA and other banks?

Banks are finding that many deeply underwater borrowers aren’t willing to keep making even reduced payments because they believe they have little hope of ever having equity in their homes and would be better off renting and perhaps buying a cheaper home later.

By cutting principal, Bank of America said, it will reduce the risk that borrowers will default again later. “We believe this could become an industry model for principal forgiveness,” the bank said.

The program also addresses the woes of option ARM borrowers whose loan balances have increased over the years because they made minimal payments that deferred part of their interest due. Some of these borrowers will qualify for a reduction in their principal to as low as 95% of the home value.

How market value will be determined

To determine the market value of a home under the program, Bank of America plans to use computer models that estimate those values or, in some cases, opinions from real-estate brokers. Those estimated values will then be adjusted annually using metropolitan-area price indexes, Bank of America officials said.
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Source:http://online.wsj.com/article/SB10001424052748703312504575141763259183050.html?mod=rss_Today’s_Most_Popular

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5. FDIC Chairman Sheila Bair wants to force banks to reduce principal for homeowners on brink of foreclosure

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