Bank of America Corp. will permanently cut up to 30 percent from home loan balances for tens of thousands of struggling borrowers under a new program that some predict will become industry norm.
The plan, announced Wednesday, was virtually unthinkable just months ago.
So taboo was the idea of forgiving principal amounts, that some lenders refused to comment when Ron Faris, president of West Palm Beach-based Ocwen Financial Services, promoted it as a solution to the continuing foreclosure crisis before a congressional committee earlier this month.
But with millions of Americans underwater on their home loans, and increasingly willing to walk away, bank officials said Wednesday that cutting loan amounts is necessary to reduce defaults.
“The banks have been reluctant to come to the reality that ‘Houston, we have a problem,’” said Michael Sichenzia, president of Dynamic Consulting Enterprises in Deerfield Beach. “It’s inevitable more banks will follow. The cost to administer foreclosures is growing exponentially.”
Bank of America, which estimates it has 1.5 million home loans that are 60 or more days behind on payments, calls its plan “earned principal forgiveness.”
To qualify, a borrower must prove financial hardship, be two months delinquent in payments, and owe at least 20 percent more on the loan than the home is worth.
The program targets the riskiest home loans awarded during the real estate boom including subprime adjustable rate mortgages and certain loans that have a fixed interest rate for the first two years before adjusting annually.
Under the new plan, which begins in May, a portion of the principal balance will be set aside interest free. That principal can then be forgiven over five years if the homeowner stays current on new lowered payments.
Obama Expands Foreclosure-Prevention Efforts
The White House will announce Friday an expansion of its foreclosure-prevention efforts to include reducing the mortgage loan balances for some distressed borrowers and giving temporary help to the unemployed, people familiar with the plans said.
In the latest overhaul of the year-old mortgage-loan modification program, these people said, the White House will announce plans to allow unemployed borrowers to receive sharply reduced payments—or a break from making any payments—for at least three months and up to six months. The revamp will also require banks to consider writing down loan balances as part of the formula for lowering monthly payments under the federal Home Affordable Modification Program, or HAMP.
In addition, the administration will introduce a program that uses the Federal Housing Administration to insure new loans for borrowers who are underwater, owing more than the current values of their homes.
Under that program, investors who reduce loan balances to 96.5% of the current property value would refinance borrowers into an FHA-backed loan. Investors would have to reduce first-lien mortgages by at least 10%. For properties that have second-lien mortgages, the program is designed to reduce the total mortgage debt to no more than 115% of the estimated property value. Banks that hold second-liens will be eligible for incentive payments if they write down those loans so borrowers can qualify.
To pay for the expanded program, the administration will allocate $14 billion in money from the Troubled Asset Relief Program that had already been earmarked for foreclosure prevention efforts.
An administration official said that the program adjustments were designed to “better assist responsible homeowners who have been affected by the economic crisis through no fault of their own.” The administration is trying to walk a fine line, offering more help to the most troubled homeowners without encouraging people who can afford their payments to default in the hope of getting similar treatment.
Through my own experience the qualifiers do not help most people.
American Eagle Realty can help you with solid answers about your rights and options before your house is foreclosed on!
American Eagle Realty
www.american-eagle-realty.com
502-969-1801
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