Bank of America to eat some mortgages

The bank will announce a plan to help homeowners who owe more than twice the value of their homes, according to a news report.

By TheStreet Staff Mar 24, 2010 1:10PM

By Lauren Tara LaCapra, TheStreetTheStreet


Bank of America (BAC) plans to take a dramatic step toward righting its most troubled mortgages, forgiving up to 30% of loan principal in some cases, according to a news report.


The move by the largest US lender, set to be announced on Wednesday, is likely to lead to writedowns but also help struggling homeowners who don't qualify for help through federal plans. Bank of America's plan will target borrowers who owe more than 120% of their homes' value, and offer interest-free forgiveness on loan payments, as long as they stay current.


The plans were reported by Reuters on Tuesday evening, based on a summary of the program.

The plan seeks to move "negative amortization" borrowers -- a group that has continued to expand as home values have fallen -- from deep underwater to treading water over five years. This pool of borrowers is one of the most troubled, because they have lost all equity in the asset and have little incentive to pay.


Some borrowers have stayed in homes without making mortgage payments for months until foreclosure proceedings get under way, and only leave when evicted. As they pocket and save monthly mortgage payments until evicted, it's a lose-lose situation for banks and borrowers.


As the largest mortgage servicer in the country, Bank of America's strategy could set standards for the rest of the industry. Bank of America had been criticized for lackluster performance in the federal Home Affordable Modification Program, compared to lenders such as JPMorgan Chase (JPM) and Citigroup (C). However, Bank of America has turned up the dial in recent months, moving many more trial modifications into permanent ones.


Bank of America isn't the only major lender to publicize unorthodox strategies to keep borrowers current. Wells Fargo (WFC) has been a leader in this sense, offering the most troubled homeowners from its Wachovia acquisition a seemingly generous incentive. Borrowers in this "pick-A-pay" portfolio -- who were once able to choose their own monthly payments, even if it fell below interest level -- can now pay interest-only over the next six-to-10 years.


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It's unclear how many negative amortization loans Bank of America has, or what the impact of this program will be for investors in the short term. Its purchase-impaired portfolio from the Countrywide acquisition stood at $33.7 billion. It had $242.1 billion in overall residential mortgage exposure, of which 8% was 30 days or more past due. Nonperforming assets accounted for $17.7 billion.


At most of the major banks, problem loans have continued to rise, but the rise has leveled out a bit, indicating that they may be near the end of the loan-loss cycle. Getting ahead of the next problems, as Bank of America and Wells Fargo appear to be doing, may be the quickest way to move forward from the housing crisis.


Related Articles


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Bank of America racks up regulatory risk



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