Hat tip to dough, and as seen on CR from cnbc.com:
This morning executives at Bank of America rolled out their new “Principal Reduction Enhancement” program, which is an earned principal forgiveness plan for borrowers behind on their mortgages and whose loans are at least 20 percent underwater in value. The plan is in conjunction with the government’s Home Affordable Modification Program, but the government’s principal reduction plan isn’t in place yet.
What makes BofA’s plan so proactive is that it employs, “a principal reduction as the first step toward reaching HAMP’s affordable payment target of 31 percent of household income when modifying certain NHRP-eligible mortgages — ahead of lowering the interest rate and extending the term.”
On the conference call to announce the program this morning, BofA’s credit loss mitigation executive, Jack Schakett, said the amount of strategic defaulters (those who can pay their loans but opt not to) are “more than we have ever experienced before.” He went on to say, “there is a huge incentive for customers to walk away because getting free rent and waiting out foreclosure can be very appealing to customers.”
Schakett says the foreclosure process is still taking 13 to 14 months (and by my estimates that’s an optimistic assessment), and so there’s over a year of free rent. While the banks are trying to improve the time, they’re just not there yet.
31 percent of foreclosures in March were deemed to be “strategic default” by researchers at University of Chicago and Northwestern University. That’s up from 22 percent in March of 2009.
We already know that mortgage walkaways are more prevalent among borrowers whose neighbors or friends have done the same thing. We also learn from those same researchers that the likelihood of walking away increases by 23 percent when homeowners learn that a neighbor got some principal forgiveness.
Some recent articles on this:
http://www.nytimes.com/2010/06/01/business/01nopay.html?scp=2&sq=david%20streitfeld&st=cse
http://www.capitalgainsandgames.com/blog/stan-collender/1767/why-arent-banks-foreclosing-more-often-more-homeowners
What a surprise!
Once I know that someone else has done it, I might actually try it? I’ve never heard of that concept before.
I’m shocked, shocked, I tell you!
Chuck
Why didn’t I buy a house in 2006-07 and get all this free funny money?
Defaults and walkaways are starting to become the norm. IMO, these banks won’t be able to keep up with them no matter what ridiculous programs they implement.
I wonder what the tipping point of societal breakdown and only a minute minority continues to pay their mortgage?
Will it happen?
Fight Club: “erase the debt record so that everything can go back to zero”
Please don’t talk about fight club.
There’s no such thing as Fight Club…
Chuck – are you suggesting that only ‘minorities’ will be the ones paying their mortgage? what about the other people?
IMO, these banks won’t be able to keep up with them because of the ridiculous programs they implement.
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Fixed it for ya! 😉
I still say that a prinicpal reduction can make straight financial sense to a bank in some situations. If a house has a $400k loan on it, but is now only worth $150k on the open market, a principal reduction to $250k is double (after costs) what the bank would get if it foreclosed upon the propetry. Why wouldn’t they go that route for simple economic reasons? All the government plans are simply sideshows, IMHO.
Hmmm…if I stop paying my rent, think I’ll get 13-14 mos. free rent…?
My sincere hope is that banks DO lower principles because it’ll set off a chain reaction like we’ve never seen before. Next up: credit cards. I urge everyone to run them up to the limit and then stop paying. What are they gonna do? The government and banks have already set a precedent that irresponsible behavior gets rewarded. And besides, how can you sustain the unsustainable (oxymoron); an economy that was built on debt? Correctimundo! Forgive past debt and issue new debt!
If they’d simply allow people to put their property down payment on a credit card, we could *really* get the ball rolling toward economic recovery…
Those guys at BofA are brillant, no wonder they keep getting those huge bonuses.