August 25, 2019

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.

Government announces that help is on the way for underwater or unemployed borrowers

In the last post, we discussed underwater mortgages – the term used to indicate that a homeowner owes more money on the mortgage than the home is actually worth. As the article indicated, these are the number one cause of foreclosures, but fortunately, it looks like there may be hope on the horizon for those people who find themselves in underwater mortgages; If your home is severely underwater or you’re an unemployed homeowner, the government has announced that they will be offering additional options for struggling homeowners.

If your home is underwater and you’re borrowing money, there are two options. If you are making payments on time you may be eligible for a refinance with an FHA loan (a federal assistance loan). If you’re late on payments 60 days or more, however, you must apply for assistance through the Home Affordable Modification Program. Under HAMP, lenders, including many of the major ones, are offering principal reductions.

If you have made your mortgage payments but your loan is underwater, the refinance will be done through an FHA guaranteed loan. Your mortgage debt must be over 115% of the current market value and you must meet all guidelines in order to be eligible for an FHA guaranteed loan and a principal reduction. Your principal could be written down so that your total mortgage debt is less than 115% of the home’s market value.

If you own a home and are unemployed, you can receive a temporary reduction in mortgage loan payments for at least three months (maybe even up to six months), and in certain instances you may be able to skip payments altogether. To be eligible for payment reduction, you must be receiving unemployment checks, and the payment will be set at 31% of income based on your unemployment check. Other factors determining eligibility include that your home is your main residence, you have a mortgage balance less than $729,750, you owe mortgage payments that are not larger than 31% of your income, and you can prove financial hardship.

It’s possible that some borrowers still cannot afford the loan even after the reductions because they own more than they can afford. Lenders will be given incentives by the government to write down loans, including alternatives for short sales and deed-in-lieu of foreclosure. Lenders did not used to be required to try alternatives of principal reductions with a loan modification, but now must look at both a principal reduction and a reduction in interest rate.

“Underwater” Mortgages Down, But Many Foreclosures Still in Sight

Numbers have shown that the amount of underwater mortgages has decreased. A mortgage is called “underwater” when the homeowner owes more money than the home is actually worth. While the numbers of these types mortgage foreclosures are dropping, some experts caution that the amount of foreclosures in general will remain high.

A residential real estate report from Zillow.com illustrated that the number of underwater mortgages of single-family homeowners has dropped to 21% from 23%. This may seem like a small change but it’s a step in the right direction.

Underwater mortgages are the number one cause of foreclosures, and when homeowners have an underwater mortgage, it increases the probability that they will lose their home to foreclosure. This decrease in underwater mortgages makes people hopeful that there will be a drop in foreclosures as well. However, there is a possible downside to the decrease too. The decrease may be attributed to the fact that so many homeowners have already lost their homes to foreclosure that the number of underwater mortgages has decreased because the homes are already lost.

A report by CNN says that there are 1.2 to 1.5 million mortgages that are seriously delinquent, which means that payments are at least 90 days late. History shows that it’s rare for seriously delinquent homeowners to catch up on payments. These numbers show that even though underwater mortgages are down, many foreclosures are probably still in sight.

The number of foreclosures may rise even more in result of adjustable rate mortgages. Borrowers in these ARM mortgages can make minimal payments on their mortgages which don’t even cover the interest on the loan. In result, many borrowers will not be able to afford the payments which may lead to more foreclosures.

Borrowers in these cases were for a time allowed to make minimal payments on their mortgages. In the meantime, however, these payments did not even cover the interest of the loan, and when the mortgages reset borrowers will be required to start paying down the principal. Many people will not be able to afford these payments, and more foreclosures are likely to follow.

More home loans falling into foreclosure are actually conventional loans (not bad credit loans)

It is natural to think that bad credit loans are to blame for housing foreclosures, but according to the State Foreclosure Prevention Working Group, more home loans falling into foreclosure today are actually conventional loans.

The stereotypes of homeowners who are facing foreclosures suggest that they have bad credit histories, are struggling to pay their mortgage payments, and have a history of not paying their bills on time. However, the reality today is that prime loans are regularly the loans falling into foreclosure. Prime loans are loans given to consumers with strong credit and a history of paying their bills on time. In the current shaky economy, an increase of responsible borrowers are losing their jobs or facing pay cuts, leaving all types of borrowers facing foreclosure.

While mortgage loan modification programs have received substantial press, they have had little impact on the number of housing foreclosures in the country. Studies have shown that a reduction in principal balance over 10 percent often results in homeowners not falling into foreclosure. Unfortunately, only 9 percent of mortgage loan modifications in October of 2009 met this reduction.

Many homeowners argue that the lenders are the true source of the problem, as they relay horror stories of having no progress in the modification programs. At the same time there are homeowners, at a smaller number, who have success stories backed up by data on the Making Home Affordable Program that shows lenders are making progress.

This new face of foreclosures leaves me questioning how legislators and lenders will address the problem, as bad credit loans aren’t the chief cause anymore. Can mortgage lenders and the federal government work together to encourage more loan modifications? Foreclosures may continue to increase long after the recession is officially over, due to the impact of the economy on people’s personal financial situations. While there is no quick fix to the housing crisis, hopefully the number of foreclosures can be stemmed.