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.
More from CNBC and MSN Money:
This is not a government bailout. This came about because of Bank of America's lending practices and giving loans to those not qualified or extending the value of your home more than it was worth. Don't blame the people that were lied to about the value of their homes. The banks are responsible for increasing the values of all our homes, way beyond what the are worth. It's great when you buy a home cheap and sell high, but not the opposite.
Again, a bail out for those that made a purchase with no consideration to what would happen is they no longer had a good paying job so they could meet their mortgage. When is someone going to help those of us that have struggled to meet our obligations, when we could have simply walked away. When are we gong to get a break!! I don't mind help those that need help, but I do mind helping those that are not willing to work two jobs to meet their obligations, or those that made stupid decisions. Reckless spending should NOT be rewarded!
LIVE BOA LIVE!!!!!!!!!!! I want a handout to.I just bought a new Lincoln MKS, and financed it at BOA ,I should have bought a Bently and had them write that down.
Any fool who believes this is living in fantasy land LOL!!
Wish I hadn't been responsible and paid-off my (modest) mortgage. Now I don't qualify for any handouts; government or private sector settlements!! NOT!!!
If someone was actually wronged, I have no problem with the settlement.
However, for those who over-extended and over-spent to get themselves into trouble, let 'em bail themselves out! Reckless spending should not be rewarded!!
Be very careful if attempting to get a mortgage modification. Only about 25% are "successful," and the vast majority of the "successful" modifications are merely "forbearances" that allow you to defer 3-6 mos of payments that are added on to the end of your loan, and actually increase your debt and payment when the payment resumes. This increases the fee income earned by the mortgage servicer, who is probably not the "owner" of the loan. Statistically, only about 8% of the "successful" modifications involve a principal reduction, which means only about 2% of those to try to get a principal reduction actually get one.
Meanwhile, 98% who try to get one but fail have impaired their credit and taken themselves out of the market for a refinance, which has a much greater chance of success, especially if yours is a Fannie Mae or Freddie Mac-owned loan eligible for a HARP2 or Refi-Plus refinance. All your attempt to get a principal reduction does, in most cases, is lock you in with your loan servicer for at least another year, protecting the servicers revenue stream.
Important things to understand:
Servicing loans is more profitable than originating loans. Lenders make less than 1% of the loan amount in net profit after expenses. It's time consuming, labor-intensive, and risky to originate loans. But lenders pay dearly (around 2% of loan amount) for the rights to "service" your loan, i.e., collect the payments and distribute the revenues, for which they make at least .25% of the loan amount every year, a much better return on their investment with lower expenses because most of the work is done by computers.
The lender who is servicing your loan would lose more in the loss of servicing revenues than they would make refinancing your loan, and they would have to pay another 2% or so to regain the servicing rights, so they are the LAST lender to go to for a refinance.
The industry does just enough principal reductions to convince people that they are possible, but in about 98% of the cases, they're luring you into the process to protect their servicing revenues. If you haven't lost your job, become disabled, or had a death or divorce, and if you were qualified to refinance thru HARP, your modification will be denied. If you skip a couple of payments just to qualify for a modification, they're on to you, and will turn you down flat. And you will have ruined your other options that probably would have helped you more, which works to the benefit of your current loan servicer.
Yeah, this is totally fair. I pay my mortgage on time every time, and I only borrowed what I could afford to pay for. I'm nearly underwater (ahead by about $4,000...) because of the FHA plan that legally put me into a home with only a 3% down payment on a house that has done nothing but decline in value since I bought it, thanks to continuing housing market problems.
I don't get a principal reduction, though? Because I'm not behind on payments and because I bought a house that I could afford. Thanks a lot....
"The BUYERS bought homes they couldn't afford. This was the root of the problem. Period. You are one of those "victims" aren't you? Someone that bought a house during this period of ridiculous, unrealistic home value appreciation and want a scapegoat to blame that will make you feel better for your bad financial decisions."
Your speculation of me, and your speculation of the housing situation are equally flawed.
No, I am not one of those "victims".
My home is paid for, and has been for years.
The bad financial decisions were made by the banks.
All the banks needed to do, was check the credit scores, outstanding loan balances, work history and several payroll check stubs. They did none of that.
I will assure you that if you yourself loaned out money to people without checking any of those items, most people would consider you the idiot for loaning the money to people without checking them out. well, I consider the banks to be the idiots. Yes, of course many tried to scam the system and do not deserve pity.
For those who say some law forced the banks to make these loans, why can't you get one of these loans now? The "law" you say that caused this, has not been repealed or changed. BUT, those loans are no longer available. The reason is, your law does not exist, in the form you state. Read the law....it does not force the banks to give loans to people who can not afford them.
Wake up people.
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