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Can you knock $62,000 off my mortgage from B of A?

Even if you can't, it's a foot in the door for sanity -- finally.

By Karen Datko Mar 26, 2010 2:39PM

This post comes from Marilyn Lewis of MSN Money.


Don’t go counting your mortgage chickens just yet. They’re not likely to hatch for some time.


If ever.


I’m talking about Bank of America’s decision to finally do what many people have thought for years was just plain common sense: reduce the principal on some mortgages. 


Some mortgages are the operative words in this deal, though. Only 45,000 of B of A’s 1.2 million homeowners in default will get write-downs. B of A’s decision was part of a settlement with the Massachusetts Attorney General’s Office, which accused Countrywide of predatory lending.


Yes, this amounts to bailing out homeowners who made bad decisions. But, as long as we taxpayers are bailing out the banks, why not ask the banks to throw a little in the direction of all the homeowners in trouble? Modifications aren’t working.

Foreclosures are pulling down the economy and everyone’s home values. There’s no end in sight and no one’s got a better plan. A Bank of America exec said this week what’s been obvious for years: “Modifications are better than foreclosure.” Even for the banks.


How do we score?

Sounds good to me. I’ll take $62,000 -- the average reduction -- off my mortgage.

So, how do you and I get in on this and snag our own 30% write-down? For starters, we need the right kind of loan: a Countrywide mortgage. B of A acquired Countrywide, along with all the bad loans it made, back in 2008. Only those mortgages qualify.


Also, says the Wall Street Journal’s Developments blog:

And only the riskiest loans will qualify: subprime loans, “option adjustable-rate” mortgages that have low initial monthly payments but that can adjust sharply higher, and certain prime loans that have a fixed interest rate for the first two years before starting to adjust annually.

Many homeowners, to their everlasting regret, have such “toxic” loans. But, that’s not enough. You also have to be in deep trouble. You have to:

  • Have to have missed two consecutive mortgage payments. In case you’re thinking you could just start skipping payments now, consider that you can get only 20% of the write-down each year for five years. Make payments on time for five years and you get the full deal.
  • Demonstrate your finances are in abysmal shape.
  • Have a home deeply underwater, meaning that your mortgage balance is at least 120% of your home’s current value. For example: If your house is worth $200,000 today but you owe $300,000 on the mortgage, your mortgage balance is 150% of your home’s value.

Meanwhile, don’t call B of A. They’ll call you. The bankers are combing their records for eligible borrowers. We cannot apply.


A ‘game-changer’

Will it work? The evidence is encouraging. National Mortgage News, an industry publication, quotes Barbara Desoer, the president of Bank of America's home loans unit, saying that B of A has already tried the tactic with a smaller group of similar borrowers. The result:

B of A offered to reduce principal by 25%, and thereby cut loan-to-value ratios to 110%, for this test group. Thirty percent of the group responded, Desoer said.
That is a strong response rate these days; some servicers have said they are happy when 8% of the delinquent borrowers they contact respond.

So, it’s more than a pilot project. Possibly even the foot in the door needed for sanity to prevail among the banks. The New York Times calls it “a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure.”


The National Mortgage News predicts a powerful ripple effect:

Most observers said other servicers may well replicate B of A's targeted approach to principal reductions, though they disagreed on how soon and how often that would happen.
"This could be a game-changer," said Steve Horne, the president of Wingspan Portfolio Advisors, a specialty servicer in Carrollton, Texas. "There has been a lot of resistance to meaningful principal reductions on a large scale, and this may herald the advent of that strategy."

Related reading:

Nov 9, 2010 7:47PM
What are the legal ramifications if the owner/servicer is unable to produce the Note to the property? Especially in loan modification negotiations?
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