For once, now might be a good time to have a Bank of America home loan.
Under the $25 billion foreclosure settlement signed last month, Bank of America will offer to write down the loans of more than 200,000 underwater homeowners to market value, said Shaun Donovan, the Secretary of Housing and Urban Development, in an interview Monday with The Huffington Post. Other banks will also make these principal reductions, but are not required to offer as much relief, Donovan said.
"This is a universal program with deeper principal reduction than required [of other banks] under the settlement," Donovan said.
For four years, homeowners with loans owned by Bank of America have struggled, sweated, and swore in reaction to actions taken by the giant lender, which is notorious in housing circles for having one of the worst track records for servicing troubled home loans. It's unlikely that this one action, taken under duress, will change many minds, but offering borrowers principal reductions gives them the best chance to avoid foreclosure, many economists have said.
Bank of America must offer the deal to any borrowers who meet a certain set of criteria: Homeowners must be underwater, which means they owe more on their loan than their home is worth. They must be delinquent by more than 60 days on their mortgage payments. And their mortgage payments must account for more than a quarter of their income.
"This commitment is a good thing," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "BofA also had the most incentive to get this [investigation] resolved."
Rheingold said that Bank of America, which is embroiled in many other legal battles over servicing misconduct, wanted more than the other banks to get the attorney general investigation behind it, so it may have offered more complete principal reductions as an extra incentive to get a deal done.
“This program expands on other targeted principal reduction programs we offer to address the large volume of delinquent legacy Countrywide loans, and the goals are the same: To keep as many troubled borrowers in their homes as possible, reduce foreclosures, and help stabilize the housing market," a Bank of America spokesman said in a statement.
The deal, which was reached Feb. 9 but has not yet been finalized, requires Bank of America and four other banks -- JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial -- to provide at least $10 billion in principal reduction to underwater borrowers who are delinquent or at immediate risk of default. Bank of America is on the hook for the biggest share, $8.58 billion, though that also includes expenditures for refinancing programs.
Borrowers whose loans are held by the other banks won't get as much relief. While they collectively must provide more than $10 billion in relief to homeowners, they are not required to offer a principal reduction to all borrowers who fit into a particular demographic, as Bank of America might. When offering a principal reduction, they are also required to write down the loan value to only 120 percent of loan value, instead of to market value. (For example, a homeowner with a $300,000 mortgage but a home worth just $200,000 would qualify for the outstanding principal to be written down to $250,000.)
All told, the settlement would offer financial assistance for between 750,000 and 1 million homeowners, government officials have said.