Reporting from Los Angeles and Washington — Bank of America has agreed to reduce the loan balances of underwater homeowners more aggressively than other banks, saying that by next month it will start contacting 200,000 borrowers who may qualify.
The pledge is part of a side deal that BofA signed when it and other large providers of mortgage customer service reached a recent $25-billion foreclosure-abuse settlement with state and federal government agencies.
Writing down the balance of home loans for underwater borrowers — people who owe more than their homes are worth — is a controversial practice. Studies have shown, though, that it is an effective way to motivate troubled borrowers to keep paying their loans.
Many areas of hard-hit states such as California, Arizona and Nevada have seen home prices fall more than 50% over the last five years. Homeowners who give up on their loans exacerbate the foreclosure crisis and downward price spiral.
BofA spokesman Rick Simon said the bank has agreed to eliminate the entire underwater portion of some mortgages that it owns or services for other investors, with the average reduction expected to be more than $100,000. Most of the eligible mortgages were originated by Countrywide Financial Corp., the Calabasas home lender that Bank of America acquired in 2008.
The bank promised to provide at least $7.6 billion in relief by lowering mortgage balances and allowing homes to be sold for less than the amount owed. It also pledged to provide $1 billion in refinancing assistance to borrowers. Simon said the bank expects to exceed those targets.
The recent settlement requires other large loan servicers — Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc. and GMAC Mortgage parent Ally Financial — to reduce loan balances until they are 20% higher than the home's value.
By cutting the amount owed on the mortgages, Bank of America could reduce the $3.25 billion in penalties it faces from the foreclosure settlement by $850 million. The details of the principal-reduction agreement were first reported by the Wall Street Journal.
Underwater homeowners are eligible if they live in the home, have a loan serviced by Bank of America and were at least 60 days delinquent on their mortgages as of Jan. 31. The cutoff date was imposed to keep borrowers from intentionally going delinquent in hopes of getting their principal chopped.
The agreements do not guarantee that borrowers will be offered loan modifications, or what the terms of offers will be. The bank will calculate the expected loss on a foreclosure and modify the loan terms only to the extent that it or the investor in the loan comes out ahead financially by doing so.
But in a major change from the prevailing practice in the mortgage industry, Bank of America is to put principal reduction first among steps taken to modify loans. In the past, reducing the amount owed was a final option — and one rarely used — after cutting the interest rate, extending the time period for repayment and not charging interest on a portion of the amount owed.
Even after the settlement, Bank of America will be unable to offer principal reduction on most of the loans for which it is the servicer, or bill collector. Loans backed by the government, including Fannie Mae, Freddie Mac, Federal Housing Administration and Veterans Administration mortgages, make up more than 60% of the total and are not eligible for reductions in the amount owed.
That means the Bank of America principal reduction offers will be limited to loans that it owns and loans owned by investors in privately issued mortgage securities who have agreed to allow the bank to write down loan balances.
The bank has three years to complete the principal reductions, but the settlement offers incentives for them to be completed within a year of the settlement's completion, so Simon said he expected the process would move "fairly quickly."
Bank of America mortgage customers can call 877-488-7814 to determine if they're eligible for a principal reduction and for more information.