BofA said it will forgive up to 30 percent of some customers' total mortgage balance. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth. 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 plan is part of an agreement the bank reached with state attorneys general to settle charges over high-risk loans made by Countrywide Financial Corp. The loans were made before Bank of America acquired the mortgage lender and Bank of America has since stopped making those loans.
Although the motivation for Bank of America's announcement was to resolve legal problems, it hopefully will set a precedent for other banks to also start forgiving principal on loans that are in danger of falling into foreclosure.
The Treasury Department, is developing similar plans for principal reductions at other mortgage servicers, according to industry officials speaking on condition of anonymity because they were not authorized to discuss the conversations. They said an announcement could come in the next few months.
Although this is a baby step in the proper direction to stemming the continuing decline in home values, this, in my humble opinion. is not the answer...but, here comes MY solution to the entire housing crisis...if you read it and concur; forward it on to your congressmen, the press and anyone else you can think of!
Framing the issue: We already know that the banks are willing to do 2 things with troubled loans; 1) foreclose, and 2) short sell. The biggest trouble with both is that after a foreclosure sale or a short sale there is a new, LOW sale recorded in public records...which only serves to continue to drag down the value of all of the surrounding properties (ask any appraiser). Which causes MORE homeowners to be "upside-down", which then causes more short sales and foreclosures...a vicious cycle.
Now, obviously, the banks are willing to take (or have to take) the losses from the foreclosures and short sales, but my solution eliminates the losses AND the low public record sales price...maintaining surrounding home values, eliminating vacant and vandalized homes and minimizing bank losses.
My Solution: Instead, the banks should use the same valuation/loss analytics they use to determine whether or not to accept a short sale and offer a solution to the current homeowner based upon that figure. For example...if a current owner owes $400,000 on a home that the bank would sell at a short sale or foreclosure for $250,000, the bank should re-amortize the current owners loan at the current interest rate at a principal balance of the same $250,000;
BUT, the big difference is the bank WILL NOT be forgiving or losing $150,000 because this is what they will do: the $150,000 will be a 2nd position lien on the home with NO payments due. The note for the $150,000 will include language that "writes down" the balance over 15 years. If the owners stay in the home 15 years and stay current on their loan every month, the note will be extinguished...if they decide to sell prior to 15 years, the remaining balance of the note will have to be paid off at that time. Also, NO adverse credit reporting to the credit bureaus would be allowed until and unless the owner fell into default.
The above solution addresses almost all of the problems incumbent in the current housing crisis:
- No more low sales in public records continuing to pull down the housing market
- Neighborhood stability
- No more huge losses for the banks
- No more credit-crippled 'lost generation'
I have given this much thought and have a lot more of a detailed process, with options, that I would love to propose to anyone who could help...lets start a grassroots effort to get my soultion out there!
I'd love to hear your opinions.
Thanks for reading, Steve
