Reduce Principal On Mortgage | Bank of America to reduce mortgage principal for some borrowers - Los Angeles Times
If successful, the plan could become a model for other lenders, experts say, and could also help the still-fragile housing market from being walloped by a new wave of foreclosures.
"I think this is a strong signal to the industry about the importance of principal reduction in a loan modification program," said Paul Leonard, California director of the Center for Responsible Lending, an advocacy group.
Bank of America's offer would knock as much as 30% off the principal on about 45,000 adjustable-rate mortgages nationwide. BofA didn't provide a state-by-state breakdown, but spokesman Rick Simon said the largest block would be in California.
The loans were originally issued by Countrywide Financial Corp., the loss-plagued Calabasas lender that Bank of America acquired in 2008. Countrywide was the nation's largest mortgage lender, specializing in subprime and other complex loans such as option ARMs, that went bad and helped fuel the nation's mortgage meltdown.
Bank of America's new program, adopted to settle a lending-abuse suit by the state of Massachusetts, is in addition to an October 2008 settlement with other state attorneys general that was aimed at reducing payments for Countrywide borrowers by more than $8 billion.
Since introducing programs a year ago to stem the tide of foreclosures, President Obama and other administration officials have been pushing banks to modify increasingly more mortgages. But the criteria for benefiting from those programs were difficult, especially in high-cost areas such as California.
Banks have generally sought to keep borrowers in their homes by adjusting the terms of the loan, such as extending the amount of time it takes to pay off the loan or cutting the interest rate. Lenders have resisted cutting the principal amount, which many housing advocates say is needed because of the inflated prices that homes were fetching during the housing boom.
The Bank of America program stands apart by making principal reduction the first step in the program.
The bank is not initially wiping out part of the loan balances, but instead is exercising what is known as forbearance -- setting aside payments of interest on some of the amount owed. It then would allow the borrowers to earn forgiveness gradually on that part of their debt by making regular reduced payments over a five-year period.
The plan is designed to motivate holders of some especially troublesome loans, including option ARMs, or adjustable-rate mortgages for which borrowers had the option of making payments that did not cover the interest costs for five to 10 years.
Many borrowers with option ARMs have been loath to accept modifications because they owed so much more than their homes were worth, said Barbara J. Desoer, president of BofA's home lending operations.
This is a good sign but seems to me it is just a small dent.

