Bank of America announced today that it would reduce the mortgage principle for some homeowners who owe more than their Phoenix homes are worth.
Bank of America and other lenders have been criticized for not doing enough under the Making Home Affordable Plan, the Obama administration’s $75 billion mortgage modification program, which was supposed to help millions of Americans stay in their homes. So far, only 170,000 homeowners have completed the program.
But even if the Making Home Affordable Plan were working like it was supposed to, it wasn’t designed to help homeowners who owe much more than their homes are worth. As many as half of all Phoenix homeowners are underwater – some by 70% or more in the hardest hit outlying areas.
Those are the kinds of homeowners that Bank of America’s program aims to help. Well, a small fraction of them, anyway. Of the 1.2 million Bank of American homeowners who are in default, this program will help no more than 45,000 of them. Here’s, generally, who might qualify:
- Homeowners with certain subprime and option adjustable rate mortgages that were originated by Countrywide (which was bought by Bank of America in 2008)
If you qualify, here’s what you might expect from the mortgage principle reduction program:
- The program begins in May
- Bank of America will set aside up to 30% of the principal balance
- Say you owe $250,000 on your home whose current market value is $200,000; Bank of American would move $50,000 into a special interest-free account
- You then pay principal and interest payments on $200,000
- For every year that you continue to make payments on the new $200,000 principal, $10,000 in the special account is forgiven
- $10,000 a year is forgiven until the balance is $0 or the housing market recovers and the homeowner has positive equity
I think the principal reduction idea is a great one. We’ve all been really hard hit by the housing crash, and I think that we should all feel some pain. That includes the banks that assumed the risk in making the mortgage loans. Hey, taxpayers shared the pain of the Wall Street bailout. Now it’s time for the big banks to return the favor.
And for those who say that it’s not fair to homeowners who have done the right thing and continued to pay their mortgage, even if it meant cutting back on other spending, even if it means paying on a home that’s worth less than the mortgage, I say this: it may not be fair, but principal reductions that keep people in their Phoenix homes are a lot better than a new wave of foreclosures.
From the New York Times: “Cutting the size of the debt over a period of years, however, might encourage people to stick around. That could save homes from foreclosure and stabilize neighborhoods.”
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