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Re-activateBank of America's announcement yesterday of a new loan forgiveness program could cut the principal owed by certain "underwater" borrowers by as much as 30 percent. The move, created under pressure from the Massachusetts Attorney General's office, could spell relief for as many as 45,000 homeowners, the bank estimates. The average savings would be more than $60,000 per loan.
Bank of America, which according to The Wall Street Journal collects mortgage loan payments from about a fifth of all homes in the United States, is offering forgiveness only to certain borrowers from Countrywide Financial, which it acquired in July 2008. To qualify, borrowers have to have loan-to-value ratios of at least 120 percent, meaning the loans are at least 20 percent bigger than the current market values of the homes.
Borrowers also must have missed at least two mortgage payments, among other criteria. The program has a unique feature: Participants have to stay in their homes for at least five years. If, in that time, their homes rise in value, the amount forgiven will decline. Look here for more details on the program for different types of loans.
Bank of America says it will be contacting eligible borrowers. In other words, if you don't hear from them, you're not on the list. Click here for more information from Bank of America's home-loan assistance hub.
The bank's action comes as a result of an agreement with the Commonwealth of Massachusetts in connection with an earlier complaint about Countrywide's lending practices. Read the text of the agreement with the Massachusetts Attorney General here..
One has to wonder if Bank of America would have gotten around to this solution without pressure from prosecutors. And will other banks not threatened by lawsuits consider doing the same?
What do you think? Is this a good move for B of A and its mortgage customers? Should other lenders do the same? Or is loan forgiveness of this kind likely to encourage people to default in the hope of getting a similar break?—Tobie Stanger
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