New BofA Plan Will Lower Mortgage Principal Bank of America launched a new mortgage-modification program that, for the first time, proposes reducing the principal on loans. It's the most ambitious program yet.

New BofA Plan Will Lower Mortgage Principal

New BofA Plan Will Lower Mortgage Principal

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Bank of America launched a new mortgage-modification program that, for the first time, proposes reducing the principal on loans. It's the most ambitious program yet.


Foreclosures are still at high levels, and there's been a lack of progress in bringing them down. That's the backdrop for Bank of America's announcement yesterday of a program to help people avoid default. The company says it will forgive principal on a home loan instead of just lowering interest rates. The hope is that this will give borrowers who are underwater a reason to keep making their mortgage payments. NPR's Yuki Noguchi reports.

YUKI NOGUCHI: What Bank of America is doing is striking a kind of bargain. The many homeowners who owe more on their loans than their homes are worth are being offered a deal. The bank may forgive as much as 30 percent of the principal owed on the loan, making it the first big program to actually cut the amount homeowners owe.

Barbara Desoer is president of Bank of America's home loan division. Speaking on a conference call yesterday, she says this is the key to getting homeowners on the brink to sign up.

Ms. BARBARA DESOER (President, Bank of America Home Loan Division): In our experience, we have found that severely underwater homeowners are reluctant to accept a solution that does not offer some reduction in principal.

NOGUCHI: But, of course, there are lots of rules to qualify. Homeowners must qualify for the government's existing home affordable modification program, which means they must have either a subprime or adjustable interest rate loan. And they must be a least two months behind in payments and have some economic hardship. And if they do qualify, they must make their payments on time every month for the next five years to be forgiven part of their loan.

John Taylor is CEO of the National Community Reinvestment Coalition, a community advocacy group. Taylor has not liked any of the measures designed to help homeowners to date, but this one, he says, has promise.

Mr. JOHN TAYLOR (CEO, National Community Reinvestment Coalition): All the best intention of this administration and the previous were pretty ineffective in dealing with the foreclosures because they didn't have this. They didn't have the principal write-down.

NOGUCHI: And right now, the acute problem is that at least a quarter of all homeowners are underwater. Taylor says many of them are saying: Why not just walk away?

Mr. TAYLOR: They're saying, look, why am I going to continue to pay on a mortgage? If I simply default on this, yes, it dings my credit rating, but I can pay half the amount renting, or I can even go buy another house with a co-signer and pay half the amount on a mortgage.

NOGUCHI: The Bank of America program alone will do little to make a dent in the nation's foreclosure problem. It is, after all, only a pilot program that would apply, for now, to 45,000 homeowners. But Taylor says the real benefit will be if other institutions - such as Citigroup, Fannie Mae and Freddie Mac - follow suit. The new program also has plenty of skeptics.

Ms. TRENDA KENNEDY: The mortgage modification process with Bank of America has been incredibly frustrating.

NOGUCHI: That is the weary voice of Trenda Kennedy, who is $10,000 underwater on her Springfield, Illinois home. Bank of America foreclosed on her home last summer, but has since agreed to try to help modify her loan so she can stay in it. Kennedy says qualifying for the new program would be heaven-sent.

Ms. KENNEDY: I would love for there to be a magical miracle.

(Soundbite of laughter)

NOGUCHI: But she's not hopeful. She says the bank has asked her numerous times to resubmit papers just to qualify for a modification under the bank's previous loan program.

Ms. KENNEDY: I would say based on the utter disorganization of the different divisions and departments within Bank of America, the left hand doesn't appear to know what the right hand is doing.

NOGUCHI: The temporary or trial loan plan Kennedy has had expires at the end of the month. She says the bank won't say what happens after that. And that's part of the problem, according to a critical report out earlier this week. Special Inspector General Neil Barofsky's report says the government's main program for helping struggling homeowners isn't working well. He said many of the loan fixes offered so far don't stand a chance of being made permanent. And there's a risk that the government may be simply delaying foreclosures rather than addressing them. Barofsky testifies today before the House Oversight and Government Reform Committee.

Yuki Noguchi, NPR News, Washington.

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