B of A offers to slash mortgage principal
Eligible homeowners could get $150,000 on average knocked off the balance of their mortgages.
This post comes from Diana Olick at partner site CNBC.
A select group of struggling mortgage borrowers is about to get an offer that sounds too good to be true. Executives at Bank of America say that they will begin mailing 200,000 letters offering certain customers mortgage principal reduction.
"If people get these things and toss them, they won't be eligible," says Ron Sturzenegger, the Bank of America executive charged with providing solutions to borrowers in need of mortgage assistance. (Post continues below video.)
But the offer is real, and eligible borrowers could get an average of $150,000 knocked off the balance of their mortgages. It is all part of the $26 billion settlement reached this year between federal and state agencies and the nation's five largest mortgage servicers over fraudulent foreclosure document processing (so-called "robo-signing").
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Bank of America, in a deal with state attorneys general and the U.S. Department of Justice, committed $11 billion to mortgage-principal reduction, but executives say they will go beyond that if enough borrowers respond to their offer. Five thousand borrowers have already received a collective $700 million in principal reduction through a pilot program for those already in a modification negotiation. The 200,000 borrowers being targeted now may have already exhausted modification options or may have yet to contact the lender.
Executives say borrowers receiving the letters are eligible, but they still have to prove they qualify. In order to be eligible, a borrower must be 60 days late on the mortgage payment as of Jan. 31, 2012. The borrower has to owe more on the mortgage than the home is currently worth, commonly known as being "underwater" on the mortgage, and the borrower's loan must either be owned by Bank of America or be serviced by Bank of America for an investor who is allowing the modifications.
In order to qualify for the modification, the borrower must answer the letter with full documentation of income, showing that under the terms of the modification he can make the monthly payment. A borrower with no income would, therefore, not qualify. A borrower's current monthly payment must be more than 25% of gross income, and the borrower must show he is unable to afford that.
"If you can afford to make your monthly payment and are choosing not to, you will not get this principal modification," says Sturzenegger.
If the borrower qualifies, Bank of America will bring the monthly mortgage payment down to 25% of the borrower's gross income. That could mean principal forgiveness of more than $100,000, as there is no limit to the amount of the mortgage. If enough borrowers respond, it could cost Bank of America far more than it committed to in the settlement.
"Yes, we have the capability to go well beyond the $11 billion," adds Sturzenegger.
Bank executives say that before choosing which borrowers will get the offer, they performed a net present value test on each loan, making sure that the principal reduction modification would net Bank of America or the investor who owns the loan more than foreclosing on the home would. "It has to be fair to the investor as well," says Sturzenegger.
Not all of the 200,000 borrowers who receive the letters are expected to respond. Executives say there is a level of fatigue among delinquent borrowers who have already received several notices or who may have gone through a failed modification process already. Some borrowers simply don't want to stay in their homes, while others may think the offer is a scam.
"They have been contacted by a lot of other people, and this offer may appear too good to be true," says Sturzenegger.
That's why Bank of America is sending the letters by certified mail and trying to make the language as simple as possible. A sample letter obtained by CNBC shows a red box in the top corner labeled "IMPORTANT" and simple language stating, "Qualifying customers may reduce their monthly payment by an average of 35 percent."
Some 6,500 letters should be arriving in mailboxes across the country this week, with a wave of new letters going out every week until the end of the summer, when all 200,000 should have been mailed. Bank of America is staggering the mailings in order to better handle the expected response.
The bank has staffed up to handle the task, with 50,000 employees manning servicing desks, but the process will clearly take some time. That's why Bank of America has suspended any foreclosure actions against these 200,000 borrowers until the process is complete.
There are currently 5.59 million U.S. loans that are either delinquent or in the foreclosure process, according to Lender Processing Services. Bank of America services about a million of those loans, but many of them are owned by Fannie Mae and Freddie Mac. Their regulator, Edward DeMarco of the Federal Housing Finance Agency, has yet to agree to principal reduction in loan modifications, despite harsh criticism from some lawmakers on Capitol Hill and increasing pressure from the White House.
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So, there is no longer an incentive to pay your mortgage anymore, if you want it reduced just quit paying, that sounds smart...What about those that have struggled but still paid everything.
No wonder banks were in this position to begin with...
See what happens when you don't pay your bills?
Then you wonder why the country is falling apart.
If you are behind, you get help.
If you are working three jobs and keep up the payments, you don't get ****.
Welcome to America.
Perfect! I've been working three jobs (yes - THREE) for the last 18 months to stay on top of my debts. I incurred them, I owe them, and I was raised to pay my debts.
Now I realize just how stupid I really am. If I ignore my obligations, if I totally give up any sense of moral character, I too can have the home of my dreams and get everyone else to pay for it.
Only in America.
Once again the banks are creating additional downturns with what claims to be a solution. It's like the "Cash for Clunkers" all over again but on a larger scale. What’s next, forgive student loans on those who are behind because they chose a degree in an area that is over saturated or does not fit the individuals personality or took out loans irresponsibly. Common on people, this isn't that hard go back to the basic and stop adding to the issue.
I understand about being upset for the people who have already lost there homes. But what about the people who pay there bill on time. It doesn't mean they struggle any less. Again people not seeing the whole picture. If you do the right thing you get screwed, and are offered no help. I mean I'd love 150k knocked off my home, but I pay on time and do without other things and get nothing. I am in the majority here. People who don't pay get assistance help, and people on welfare forget about it.
We have sucked it up long enough! I want a dam bailout for being prudent with my finances just like the hucksters that are sucking us dry. Bunch of dam vampires!
Rewarding bad behavior.....
Punishing good behavior....
Seems to be the "New" American way....
What a shame.
I say all of us who are on time but underwater, threaten to walk if BofA doesn't lower our mortgages too!!! I just don't get the banks logic.....if you are irresponsible, we will knock $150k off your loan, if you are responsible, tough $hit!!! I would be happy to get $30k knocked off, since that is how far underwater I am. If I don't qualify, I will seriously consider starting a class action lawsuit against the bank on behalf of all of us who are getting punished for doing what is right, i.e.; paying our bills. Either reduce principal for everyone, or for no one. We're all underwater! Absolute bull$hit!
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