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Posted by on May 8, 2012 in Principal Reductions | 18 comments | Print Print

Throwing Money At Underwaters

From cnbc.com:

A select group of struggling mortgage borrowers are about to get an offer that sounds too good to be true. Executives at Bank of America say they will begin mailing 200,000 letters offering certain customers mortgage principal reduction.

“If people get these things and toss them, they won’t be eligible,” says Ron Sturzenegger, the Bank of America executive charged with providing solutions to borrowers in need of mortgage assistance.

But the offer is real, and eligible borrowers could get as much as $150,000 knocked off the balance of their mortgages. It is all part of the $25 billion settlement reached this year between federal and state agencies and the nation’s five largest mortgage servicers over fraudulent foreclosure document processing (so-called “robo-signing”).

Bank of America, in a deal with state attorneys general and the U.S. Department of Justice, committed $11 billion to mortgage principal reduction, but executives say they will go beyond that if enough borrowers respond to their offer. Five thousand borrowers have already received a collective $700 million in principal reduction through a pilot program for those already in a modification negotiation. The 200,000 borrowers being targeted now may have already exhausted modification options or may have yet to contact the lender. 

Executives say borrowers receiving the letters are eligible, but they still have to prove they qualify. In order to be eligible, a borrower must be 60 days late on the mortgage payment as of Jan. 31, 2012. The borrower has to owe more on the mortgage than the home is currently worth, commonly known as being “underwater” on the mortgage, and the borrower’s loan must either be owned by Bank of America or serviced by Bank of America for an investor who is allowing the modifications.

In order to qualify for the modification, the borrower must answer the letter with full documentation of income, showing that under the terms of the modification they can still make the monthly payment. A borrower with no income would therefore not qualify. A borrower’s current monthly payment must be  more than 25 percent of gross income, and the borrower must show they are unable to afford that.

“If you can afford to make your monthly payment and are choosing not to, you will not get this principal modification,” says Sturzenegger.

If the borrower qualifies, Bank of America will bring the monthly mortgage payment down to 25 percent of the borrower’s gross income. That could mean principal forgiveness well over $100,000, as there is no limit to the amount of the mortgage. If enough borrowers respond, it could cost Bank of America far more than it committed to in the settlement.

“Yes, we have the capability to go well beyond the $11 billion,” adds Sturzenegger.

18 Comments

  1. Jim, its a crazy world these days. Its amazing anyone is paying their mortgage anymore- In Nevada where we have the AB-284 legislation passed(making it almost impossible for banks to foreclose)- we are seeing mass bidding wars on remaining REO properties. Inventory in Vegas is falling 100-150 homes PER DAY. On my remaining reo’S(NOT MANY) I get offers 25% over my BPO value from investors. Owner occupants cannot buy a home -unless they go new(which is good for the home builders in the future)

    California is adoopting a version of this AB 284 – should be passed within 60 days. Get ready for a sellers market( albeit artificial)for the next year.

  2. I’m guessing that in 2-5 years, these BoA underwater homeowners will fall into 2 categories. 1) They still can’t make the (reduced) payments and get foreclosed anyway despite having been qualified for this program. 2) They enjoy a windfall when BoA’s principle reduction translates into a boatload of equity as home prices recover.

    So for them, the motivation for making mortgage payments once they’re in the program is to be able to realize the windfall.

    Otherwise, yeah, like coronadoandre said, the motivation for those outside of such programs to make their mortgage payments appears murky.

  3. I literally have tears of frustration standing in my eyes reading these articles.

    Why can’t I be a deadbeat instead of paying my mortgage every month? Why am I paying full freight for my house and, via tax dollars, paying for my neighbor to get a freebie?

    My house is “worth” $200k less than it was in 2006, who is going to send me a check for the difference? Jeebus wept.

  4. Reply to “Interesting” :

    this is why the wheel is broken right now.
    Many families are dealing with the same dilemma
    -to pay or not to pay.
    It appears the nation rewards the weakest links.

    it all stems with Goverment intervention. Instead of just letting market action take its course, our goverment has decided to interfere with “mother nature”. We all know how this ends- but the end may be pushed much later than I thought.

  5. @5, Thanks, Andre. I try not to let it get to me anymore but occasionally it boils over. ;)

    I’ve lived in California my whole life and we’ve seen these boom/bust cycles in housing for as long as I can remember but this is the first time I’ve ever seen the Feds and the State coddle people living in houses they’re not paying for the magnitude of it all just staggers my mind.

    I know many people in trouble or who have lost their homes but if you scratch the surface of their “trouble” you usually find multiple bad decisions on their part that have nothing to do with the downturn. I can think of only one couple who can attribute their problems to the down economy and even they overbought and stretched to the limit they could afford, yet they’re still making payments while “smarties” strategically default or otherwise game the system. Ugh.

  6. The way I read this is … if you don’t respond to this letter, BofA is going to foreclose on you as soon as you default – because not only are you underwater, there is no chance in hell you are going to ever start making payments again.

    I’m guessing this is an attempt to determine exactly which loans they can possibly salvage. They will salvage those and swoop on the others.

  7. I don’t know about salvage, it might just be a deciding point on which ones the banks are going to let ride further down the trail…for now.

  8. From HW:
    Some families living in the most deeply underwater states such as Nevada and California are receiving principal reductions exceeding $100,000 from the mortgage servicing settlement, Department of Housing and Urban Development Secretary Shaun Donovan said before the Senate Banking Committee Tuesday.

    The statement comes after Bank of America mailed letters to more than 200,000 mortgage borrowers for potential principal reduction under the robo-signing settlement. The bank began principal reduction in March, offering 5,000 trial modifications with more than $700 million in write-downs.

    “It’s not a huge number at this point, it’s in the thousands, but hundreds of thousands are now getting these letters, not just from BofA, but from all five banks,” Donovan said before the committee.

    In the fourth quarter of 2011, Nevada homeowners’ loan-to-value ratio stood at 114%, the highest in the nation, according to CoreLogic. And 61% of mortgage properties in the state hold outstanding balances that exceed its value, also the highest.

    California’s LTV ratio was 71% in the fourth quarter, while 30% mortgage properties in the state were underwater.

    It varies by location, but in a state like North Carolina, where BofA is based, families are receiving $50,000 to $100,000 in principal reduction. North Carolina’s LTV ratio was 72% in the fourth quarter, while 7% of homeowners in the state state were underwater, drastically below Nevada and California.

    Many families who were being evaluated for other types of modifications were able to receive principal reduction quickly after the settlement was finalized in March.

    “We are very encouraged by the pace with which implementation is moving on those servicing standard,” Donovan said.

    The settlement requires that not only principal reductions occur, but that there’s demonstrated ability for a family to pay and remain in their home for at least 90 days.

    “What’s critical here is not just the amount of the principal reduction, but that it gets the family to a sustainable level and keep them in their home long term,” Donovan said.

  9. I think they are making the problem worse with all this bailout nonsense.

  10. “In order to be eligible, a borrower must be 60 days late on the mortgage payment as of Jan. 31, 2012.”

    I thought the original condition was the borrower must not have missed one payment for the last six months. What a joke.

  11. Citi sent me a letter offering to “short refi” my mortgage a month or so ago for up to $179k in principal reduction. Not only am I not underwater or ever missed a payment, but I’m two payments away from pay off! Crazytime.

  12. Let’s take the deadbeat/bailout/gov giveaway money and put it into car terms…

    From Jim’s article…
    “Some families living in the most deeply underwater states such as Nevada and California are receiving principal reductions exceeding $100,000 from the mortgage servicing settlement”

    $100,000 can buy…

    - 1999 Ferrari 360 F1 Coupe and Spyder
    - 2003-1999 Ferrari 360 Modena
    - 2004-2005 Lamborghini Gallardo
    - 2007-2008 Porsche 911 Turbo

    That’s a lot of free cheese

  13. This is a moral hazard…

  14. thank god the California Legislature threw out the AB 284 bill -for now. Its creating a time machine in Las Vegas- Everyone thinks its 2004 again.

  15. They need to do this the only reason people are underwater is because these banks gave loans to unqualified buyers with no money down for arbitrary housing price valuations

  16. Jayston,

    When you buy a car with credit and can’t afford the payments does government pay off X% to make it more affordable for you?

    You think deadbeat homeowners that bought more than they can afford should be given tax dollars to stay in those houses?

    Stop all the gimmicks and just start foreclosing.

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