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Bank offers mortgage relief

March 27, 2010 by · Leave a Comment 

Plan is part of Countrywide settlement

BY IEVA M. AUGSTUMS
ASSOCIATED PRESS

CHARLOTTE, N.C. — Bank of America is giving some of its most troubled mortgage borrowers relief from the threat of foreclosure.

The bank, the largest mortgage servicer in the country, said Wednesday it will forgive up to 30% of some customers’ total mortgage balance. The homeowners must be at least 60 days delinquent on their loans and owe more than 120% of their homes‘ value.

The plan is part of an agreement the Charlotte, N.C.-based bank reached 18 months ago with state attorneys general to settle charges over high-risk loans made by Countrywide Financial. The loans were made before Bank of America acquired the mortgage lender in mid-2008. Bank of America has since stopped making those loans.

Although the motivation for Bank of America’s announcement was to resolve legal problems, it has the potential of setting a precedent for other banks to also start forgiving principal on loans that are in danger of failing. Bank of America is the nation’s largest bank, and it’s among the first to take a systematic approach to reducing mortgage principal when home values drop well below the amount owed.

Millions of homes have gone into foreclosure since the housing market collapsed in late 2007. The loans affected by Bank of America’s announcement include certain subprime and option adjustable-rate mortgages. Option ARMs allow borrowers to start with minimal monthly payments that actually increase the loan’s balance.

The borrowers who can take advantage of the Bank of America program must also qualify for the Obama administration’s $75-billion mortgage loan-modification program.

Bank of America estimates that about 45,000 customers will qualify for its plan.

The offer is to cut total reduced principal by about $3 billion. That could lower the bank’s earnings, which have already been hurt by consumers’ continuing defaults on mortgage and credit card loans. Bank of America was among the hardest hit by the credit crisis and recession.

Even so, “the move helps create the best prospect of avoiding a further downward home price spiral, which would result in even deeper losses” for the bank, said Howard Glaser, a mortgage industry consultant, in an e-mail.

According to the new plan, which begins in May, Bank of America will first offer to set aside a portion of the principal balance, interest-free. That principal can be forgiven over five years, if homeowners don’t miss any payments. The maximum decrease in principal will be 30%.

The forgiveness allows a homeowner to bring a mortgage balance back down to 100% of the home’s value, the bank said.

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