Bank of America, the nation's largest mortgage lender,
on Wednesday announced a program to offer homeowners who owe significantly more than their homes are worth the opportunity
to have their loan balances reduced.
The program, which starts in May, would potentially help about 45,000 homeowners
nationwide. In launching the effort, Bank of America is jumping into the debate about how to address the millions of homeowners
whose mortgages exceed the value of their homes and who have complicated industry and government efforts to prevent foreclosures.
have traditionally resisted reducing borrowers' loan balances, arguing that doing so would encourage homeowners to miss mortgage
payments to qualify. But as foreclosure-prevention efforts have struggled, the industry has started to relent. Bank of America
is hoping that by reducing principal balances it will give borrowers an incentive to keep up with their payments and potentially
create an industry model.
The company "has found that many homeowners who owe considerably more on their mortgages
than their homes are worth are reluctant to accept a solution that addresses only the amount of the payment without an accompanying
reduction in the balance due on the loan," said Barbara Desoer, president of Bank of America Home Loans.
of America plan is limited in scope. Borrowers must have missed at least two mortgage payments and be severely underwater
to qualify, owing 20 percent more than their homes are worth. It is also limited to borrowers with certain types of risky
loans, including subprime mortgages or other loans with a two-year adjustable rate.
Bank of America expects to forgive
about $3 billion in principal on loans as part of the program. The effort expands a settlement agreement that the bank made
with several state attorneys general in 2008 to modify thousands of mortgages and settles a Massachusetts investigation of
lending practices by Countrywide Financial, which Bank of America acquired in 2008.
Treasury officials have said they
were considering proposals to address negative equity, but have not given a timeline for announcing a plan. Under the federal
foreclosure-relief program known as Making Home Affordable, borrowers can receive up to $5,000 to lower their loan balances
if they keep up their payments. But that amount would make only a small dent in the problem facing millions of homeowners,
housing advocates have said.
Economists consider underwater borrowers among the most vulnerable to foreclosure, even
if they can afford their mortgages, and some industry officials worry that more of them will simply walk away from their mortgages,
or "strategically default," rather than spend a decade or more trying to regain positive equity. First American
CoreLogic has estimated that more than 11.3 million homeowners are underwater on their mortgages.
During the third quarter
of 2009, 13 percent of loan modifications included a reduction in the borrower's principal, up from 10 percent during the
second quarter, according to a report by the Office of the Comptroller of the Currency. Wells Fargo, for example, says it
has increasingly used principal reductions for homeowners with "pay option arm" loans. The bank says it forgave
$2.6 billion in borrowers' principal balances for these types of mortgages last year.