January 17, 2020

Bank of America to Reduce Mortgage Balances

In an attempt to save struggling borrowers from loosing their homes to foreclosure, Bank of America will be forgiving some mortgage debt. In response to the Obama administration pressuring banks to confront the issues that push millions of homeowners to foreclosure, Bank of America began a program to offer more assistance for delinquent borrowers by reducing their mortgage balances, testing the idea that modifications are better than foreclosure.

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The practice of banks reducing loan balances is not completely new; it has been a growing strategy as a way to tackle the housing crisis. The amount of loan modifications which included some sort of principal reduction has increased from 3.1% to 13.2% in the first nine months of last year. Banks are increasingly willing to experience some short term losses if it would avoid much larger losses in the future if the housing crisis does not improve.

The Bank of America program is for borrowers who received high-risk loans from Countrywide Financial, which was bought in 2008 by Bank of America. At the time of the housing boom, Countrywide was one of the largest and most aggressive lenders. According to Bank of America, the new program will begin with helping around 45,000 Countrywide borrowers. This is a small number considering the 1.2 million delinquent homeowners with Bank of America at this time.

Bank of America does not want to be mistaken for giving delinquent borrowers an easy way out, and it aims to only help homeowners who truly can not afford their mortgages. The program will only help borrowers whose mortgage balance was at least 20 percent greater than the value of the house and also have great financial hardship such as a recent job loss.

It’s promising to see banks finally responding to the housing crises by taking action to help homeowners from facing foreclosure. The action of banks reducing mortgage payments is not without some controversy, but it will be interesting to see if this method will successfully save struggling borrowers and keep them from foreclosure. With Bank of America at the forefront and signs that the housing market may worsen, it’s possible other large banks may begin to offer help for delinquent borrowers as well.

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