Money Matters - Simplified

Bank of America to rescue distressed borrowers

The program would benefit around 45000 home owners whose loan amount has exceeded the worth of their houses, giving them the opportunity to reduce their loan balances.

Bank of America (BOA) on Wednesday announced that it would take steps to help mortgage borrowers who owe significantly to the bank.

The BOA, nation's largest mortgage lender, has claimed that it would forgive around 30 percent of the loan principal amount of some customers who owe hefty amounts to the bank.

The program would benefit around 45000 home owners, whose loan amount has exceeded the worth of their houses, giving them the opportunity to reduce their loan balances.

It would also encourage the defaulters to keep up with their payments.

“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.

Borrowers who are severely underwater, have missed at least two payments, and owe approximately 20 percent more than the worth of their homes qualify for the reduction program, revealed the bank officials.

Details of the program
Borrowers who are severely underwater, have missed at least two payments, and owe approximately 20 percent more than the worth of their homes qualify for the reduction program, revealed the bank officials.

First American Core Logic has estimated that more than 11.3 million homeowners are underwater on their mortgages.

The plan is also limited to customers with sub-prime mortgages or loans with a two year adjustable rate.

As part of the program, about $3 billion in principal would be forgiven on the loans.

However, economists are of view that underwater borrowers would simply skip payments in order to qualify for the plan, even if they can afford the payments.

Intentions behind the plan
The bank helps to keep the distressed borrowers who owe significantly high loan amounts from losing their homes. The bank says it had also forgiven $2.6 billion in borrowers' principal balances for these types of mortgages last year.

The plan is also a result of the pressure from the administration and the lawmakers to prevent foreclosures in the nation.

Moreover, the prices of property start declining if the sales volumes drop. Thereby, the program would help prevent future crisis in the home loan industry.

“Banks are willing to take some losses now to avoid much greater losses later if the housing market continues to spiral, and that’s a sea change from where they were a year ago,” said Howard Glaser, a housing consultant in Washington and a former official of the Department of Housing and Urban Development.

However, the decision was criticized by the special inspector general for the Troubled Asset Relief Program for over-promising and under-delivering.