Bank of America is starting an invite-only program that forgives you of your mortgage debt. A small number of homeowners holding high-risk mortgages issued by Countrywide Financial will qualify for the program, which reduces your mortgage by up to 30%. Your mortgage amount must be 20% greater than the value of your home, you must demonstrate hardship, and your mortgage payment be at least 60 days overdue. The New York Times has the scoop:
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.
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.
Most existing modification programs focus on reducing interest or extending the term of a loan, according to the Wall Street Journal, which says an estimated 45,000 people will see at least a $60,000 reduction in principal through the program. Instead of opting out of payments, the theory goes, homeowners will resume monthly payments and stay in their homes. If house prices go back up, BofA said it would cut the amount of the modification.
Bank of America just settled with the state of Massachusetts over predatory lending. The state required the bank to include principal reductions as part of the settlement.
BofA also received bad publicity several weeks ago for seizing a woman’s parrot. Its unprecedented move, however politically coerced, comes at a good time to curry public favor.