Countrywide plan may cut mortgage rates for 395,000 borrowers
Interest rates on some subprime and 'option ARM' loans will temporarily go as low as 2.5%.
With calls growing for stronger action to help troubled homeowners, consumer advocates are hailing a mortgage-modification program being implemented by Bank of America Corp.'s Countrywide unit as the most ambitious effort yet to avert foreclosures.
A key lawmaker is demanding that other mortgage lenders adopt the program, which was called for by a settlement of state lawsuits alleging that Countrywide borrowers were systematically tricked into taking out unaffordable loans.
Previous attempts to modify home loans, including a freeze on subprime "teaser" interest rates promoted by Treasury Secretary Henry M. Paulson last year, have disappointed proponents of large-scale loan workouts.
Federal Deposit Insurance Corp. Chairwoman Sheila C. Bair, who recently criticized the Bush administration for not doing more to stem foreclosures, told a Senate panel Thursday that the government should guarantee modified mortgages as an incentive for companies to ease loan terms.
Her testimony came as figures released Thursday showed the number of families in California losing their homes rose to a record high of almost 80,000 in the last three months.
The Countrywide plan, which is aimed at borrowers with subprime mortgages or pay-option adjustable-rate home loans, known as option ARMs, would temporarily cut interest rates on some loans to as low as 2.5%. Some borrowers who owe more than their homes are worth could even see their loan balances reduced, giving them equity once again in their properties.
The idea is to modify a loan's terms just enough to create a new monthly payment, including principal, interest, taxes and property insurance, equal to 34% of a borrower's verified monthly income.
Charlotte, N.C.-based Bank of America, which bought Calabasas-based Countrywide in July, estimates that the effort could cut borrowers' payments by as much as $8.4 billion.
Bank of America officials say they have obtained permission for the modifications from the vast majority of the big banks, investment funds and institutions to which Countrywide sold most of its loans while continuing to service them. Such investors have blocked many earlier efforts to modify loans, Countrywide and other loan servicers said.
A spokesman for U.S. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, called the program "the first truly comprehensive plan we've seen from the private sector."
