Bank of America to Reduce Mortgage Balances

Michael Carter - San Diego Real Estate Agent — Thu, 25 Mar 2010 01:46:53 +0000

Bank of America said on Wednesday that it would begin forgiving some mortgage debt in an effort to keep distressed borrowers from losing their homes.

The program, while limited in scope and available by invitation only, signals a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure. It comes as banks are being urged by the White House, members of Congress and community groups to do more to stem the tide.

The Obama administration is also studying whether to provide more help to people who owe more on their mortgages than their homes are worth.

Bank of America’s program may increase the pressure on other big banks to offer more help for delinquent borrowers, while potentially angering homeowners who have kept up their payments and are not getting such aid.

As the housing market shows signs of possibly entering another downturn, worries about foreclosure are growing. With the volume of sales falling, prices are sliding again. When the gap increases between the size of a mortgage and the value that the home could fetch in a sale, owners tend to give up.

Cutting the size of the debt over a period of years, however, might encourage people to stick around. That could save homes from foreclosure and stabilize neighborhoods.

“Banks are willing to take some losses now to avoid much greater losses later if the housing market continues to spiral, and that’s a sea change from where they were a year ago,” said Howard Glaser, a housing consultant in Washington and former government regulator.

The threat of a stick may be helping banks to realize that principal write-downs are in their ultimate self-interest. The Bank of America program was announced simultaneously with the news that the lender had reached a settlement with the state of Massachusetts over claims of predatory lending.

The program is aimed at borrowers who received subprime or other high-risk loans from Countrywide Financial, the biggest and one of the most aggressive lenders during the housing boom. Bank of America bought Countrywide in 2008.

Bank of America officials said the maximum reduction would be 30 percent of the value of the loan. They said the program would work this way: A borrower might owe, say, $250,000 on a house whose value has fallen to $200,000. Fifty thousand dollars of that balance would be moved into a special interest-free account.

As long as the owner continued to make payments on the $200,000, $10,000 in the special account would be forgiven each year until either the balance was zero or the housing market had recovered and the borrower once again had positive equity.

“Modifications are better than foreclosure,” Jack Schakett, a Bank of America executive, said in a media briefing. “The time has come to test this kind of program.”

That was the original notion behind the government’s own modification program, which was intended to help millions of borrowers. It has actually resulted in permanently modified loans for fewer than 200,000 homeowners.

The government program, which emphasizes reductions in interest rates but not in principal owed, was strongly criticized on Wednesday by the inspector general of the Troubled Asset Relief Program for overpromising and underdelivering.

“The program will not be a long-term success if large amounts of borrowers simply redefault and end up facing foreclosure anyway,” the inspector general, Neil M. Barofsky, wrote in his report. One possible reason is that even if they get mortgage help, many borrowers are still loaded down by other kinds of debt like credit cards.

Bank of America said its new program would initially help about 45,000 Countrywide borrowers — a fraction of the 1.2 million Bank of America homeowners who are in default. The total amount of principal reduced, it estimated, would be $3 billion.

The bank said it would reach out to delinquent borrowers whose mortgage balance was at least 20 percent greater than the value of the house. These people would then have to demonstrate a hardship like a loss of income.

These requirements will, the bank hopes, restrain any notion that it is offering easy bailouts to those who might otherwise be able to pay. “The customers who will get this offer really can’t afford their mortgage,” Mr. Schakett said.

Early reaction to the program was mixed.

“It is certainly a step in the right direction,” said Alan M. White, an assistant professor at Valparaiso University School of Law who has studied the government’s modification program.

But Steve Walsh, a mortgage broker in Scottsdale, Ariz., who said he had just abandoned his house and several rental properties, called the program “another Band-Aid. It probably would not have prevented me from walking away.”

Even before Bank of America’s announcement, reducing loan balances was growing in favor as a strategy to deal with the housing mess. The percentage of modifications that included some type of principal reduction more than quadrupled in the first nine months of last year, to 13.2 percent from 3.1 percent, according to regulators.

Few of these mortgages were owned by the government or private investors, however. Banks tended to cut principal only on mortgages they owned directly. Wells Fargo, for instance, said it had cut $2.6 billion off the amount owed on 50,000 severely troubled loans it acquired when it bought Wachovia.

Bank of America said it would be offering principal reduction for several types of exotic loans. Some of the eligible loans are held in the bank’s portfolio, but the program will also apply to some loans owned by investors for which Bank of America is merely the manager.

The bank developed the program partly because of “pressure from everyone,” Mr. Schakett said. Even the investors who owned the loans were saying “maybe we should be doing more,” he said.

Substantial pressure came from Massachusetts, which won a significant suit last year against Fremont Investment and Loan, a subprime lender. The Supreme Judicial Court ruled that some of Fremont’s loans were “presumptively unfair.” That gave the state a legal precedent to pursue Countrywide.

“We were prepared to bring suit against Bank of America if we had not been able to reach this remedy today, which we have been looking for for a long time,” said the Massachusetts attorney general, Martha Coakley.

Bank of America agreed to a settlement on Wednesday with Ms. Coakley that included a $4.1 million payment to the state.

Reducing principal is widely endorsed, in theory, as a cure for foreclosures. The trouble is, no one wants to absorb the costs.

When the administration announced a housing assistance program in the five hardest-hit states last month, officials explicitly opened the door to principal forgiveness. Despite reservations expressed by the Treasury, the White House and Housing and Urban Development officials have continued to study debt forgiveness in areas with lots of so-called underwater homes, according to two people with knowledge of the matter.

On a national scale, such a program risks a political firestorm if the banks are unable to finance all the losses themselves. Regulators like the comptroller of the currency and the Federal Reserve have been focused on maintaining the banks’ capital levels, which could be hurt by large-scale debt forgiveness.

“You have to be very careful not to design a program that would change people’s fundamental behavior across the country in a destabilizing way or would be widely perceived as unfair to people who are continuing to pay,” Michael S. Barr, an assistant secretary of the Treasury, said early this year.

Policy makers have been hoping the housing market would improve before any significant principal reduction program was needed. But with the market faltering again, those wishes seem to have been in vain.

Bank of America’s announcement came within hours of a fresh report that underscored the renewed weakness. Sales and prices are dropping, leaving even more homeowners underwater.

Sales of new homes fell in February to their lowest point since the figures were first collected in 1963, the Commerce Department said. Sales are about a quarter of what they were in 2003, before the housing boom began in earnest.

“It’s shocking,” said Brad Hunter, an analyst with the market researcher Metrostudy. “No one would ever have imagined it would go this low.”

By DAVID STREITFELD and LOUISE STORY

Michael Carter
San Diego Real Estate Agent
MTC Future Realty
(619) 488-5774

Property Values Fall Again

Michael Carter - San Diego Real Estate Agent — Thu, 11 Feb 2010 02:35:27 +0000

U.S. home values declined another 5 percent in the fourth quarter, compared to the previous year. This was the 12th straight quarter of year-over-year declines, reported Zillow.com.

More than 29 percent of homes sold in 2009 in the U.S. went for less than sellers originally paid for them, Zillow said, estimating that more than 20 percent of U.S. home owners owe more on their mortgages than their properties are worth.

“While the next few months are likely to bring further home value declines in most markets, we do expect to see a national bottom in home prices by the middle of this year,” Zillow Chief Economist Stan Humphries said in a statement. “Thereafter, home values are likely to bounce along the bottom with real appreciation remaining negligible for some time.”

Source: Bloomberg, Daniel Taub (02/10/2010)

Michael Carter
San Diego Real Estate Agent
MTC Future Realty
(619) 488-5774

Will Rewarding Borrowers Prevent Defaults?

Michael Carter - San Diego Real Estate Agent — Wed, 10 Feb 2010 15:41:06 +0000

Will paying underwater borrowers to keep meeting their mortgage obligations prevent them from walking away?

Loan Value Group LLC says it is working with a major mortgage lender to test this theory.

Here’s the plan. The mortgage investor offers a cash reward to borrowers to keep paying. The amount varies by borrower based on income, negative equity, geography, and other risk factors. The more likely a borrower will default, the bigger the carrot.

The borrower can’t collect the payment until the mortgage is paid, although the rewards can be used to help pay off the mortgage if the property is sold.

The plan keeps lenders from having to mark properties to market and take big losses. Frank Pallotta, a founder of Loan Value Group and former executive at Morgan Stanley and Credit Suisse, says the program will pay for itself if only a few borrowers stay put and keep paying.

Source: The Wall Street Journal, Nick Timiaros (02/08/2010)

Michael Carter
San Diego Real Estate Agent
MTC Future Realty
(619) 488-5774

SAN DIEGO REAL ESTATE AGENT BLOG » Buyers Mortgage Default

Bank of America to Reduce Mortgage Balances

By DAVID STREITFELD and LOUISE STORY

Property Values Fall Again

Will Rewarding Borrowers Prevent Defaults?