Maybe you’ve heard by now that B of A came out with a new plan to help distressed homeowners by reducing their mortgage principal. Wow, that’s sounds so great. Really, that’s what everybody thought the banks would do with loan mods. In fact, true to form, the big banks refused to drop the principal 98% of the time, preferring to add 10 years to the loan [40 year loans, enslaved for life] or to forebear collecting on part of the principal for 3 to 5 years, but never actually lowering the principal–no way, Jose!
So now, Big Bad B of A is going to be the first to do this? Yeah, right. Check the fine print and you will see that it’s mostly smoke and mirrors. B of A has gotten such rotten press in the past couple of years that they are apparently desperate for some positive commentary in the news media. And, this move has gotten some very good press.
What is B of A Principal Reduction Plan?
Simply put this plan would reduce the principal for homeowners who are at least 20% underwater on their loans. If you owe, say, $300K but your home is now worth $200K, the bank would reduce the principal to $240K and call it good. That’s what a cursory reading of the “pilot plan” would have us believe.
That’s fantastic, right? I have a B of A loan, you might be saying to yourself, how do I get in on this great deal? This is what I’ve been waiting for.
Hold your horses there, cowboy. Take a look at the fine print. First, this is a pilot program of 45,000 borrowers who have adjustable mortgages originally underwritten by Countrywide, purchased by B of A in 2008. Second, these few loans are being written down to 31% of household income or possibly to a very low interest rate such as 2% with a 40-year term.
And, borrowers would have 20% of the forgiven debt applied per year for 5 years when the lower amount becomes permanent unless the home value at that point is higher.
Are you with me so far? It’s a complicated plan, as is everything B of A does, and it would surprise me very much if it took less than 6 months to activate even one principal reduction.
What’s Not to Like About B of A’s Principal Reduction Plan?
As indicated, right now it’s merely a pilot program announced with a big fanfare–front page on the L.A. Times–geared to garner the most good PR for the worst of the big banks. Here are just a few of the many issues involved in the effort to lower principal.
Mainly, I would say this bank is trying to protect itself from the barrage of forensic loan audits now in the pipeline which show these types of loans—stated income, adjustable, negative amortization, etc—were actually fraudulent. To avoid lawsuits, if the bank can change the terms of the loans, it becomes lawsuit-proof.
Another major issue concerns secondary liens. What are the second lien holders going to say about principal reduction which essentially wipes out their stake in the property?During the heyday of these loans [about 2002-2007] most of the adjustable loans were 0% down, a first loan of 80% of the purchase price and then at a higher interest rate a second loan at 20%. That eliminated the dreaded PMI [private mortgage insurance] on the 20% value and also set us on our way into the present loan morass. Most of the seconds around Southern California done in this way are already essentially wiped out as home values have dropped 30% to 50% almost everywhere. But, in a short sale, for instance, the second loan holder typically gets something. Now, B of A would just tell them—“Sorry, you’re out of luck. We’re reducing the loan and wiping you out”?
To add to the mess, most of the second loans and many of the first loans were sold in pieces through the so-called mortgage-backed securities bundled up by the big Wall Street firms and flogged all over the world. It’s difficult to see how simply wiping out this debt obligation would be acceptable.
Have a B of A loan and hope is surging? Don’t hold your breath.