Here’s something you don’t see every day – a copy of an unsolicited Principal Reduction [Mortgage] Loan Modification offer from Bank of America.
From Calculated Risk:
According to Calculated Risk, the background to this offer is that the homeowner bought the house in May 2005 for $420,000; the house is now estimated to be worth about $325,000. BoA is offering to reduce the principal owed by the homeowner to $334,400 — almost the market value of the house — from $445,835, with the new loan at a fixed rate of 5.5 per cent amortised over 40 years and a balloon payment of $198,000 due in 25 years.
Where loan modification programmes like the Home Affordable Modification Plan (Hamp) seek to reduce interest payments, this kind of programme aims to reduce the total principal owed – something which has been unusual for the banks to do historically, but seems to be gaining pace now.
This, for instance, is from the Wall Street Journal:
Banks and loan investors are starting to bite the bullet and lower the principal due on home mortgages for some struggling borrowers, a new report from bank regulators shows.
That’s good news for some homeowners, but may portend more write-offs over the next few years for banks and other lenders now wading through hundreds of thousands of applications for loan modifications. The tradeoff for banks is that by taking the hit now they can boost their chances of being repaid.
Banks and loan servicers modify loans primarily by reducing interest rates or extending the term of the mortgage. These methods can temporarily help borrowers struggling to make payments without requiring lenders to lower the principal owed. Now, in a small but growing number of cases, banks are going further and writing off some of the loan altogether.
According to that report (from the Office of the Comptroller of the Currency and the Office of Thrift Supervision) the portion of loan mods in the second quarter of 2009 that involved principal reduction jumped to 10 per cent, from 3.1 per cent in the first quarter.
Another difference between the Bank of America proposal and the Hamp is that the former doesn’t require any financial documentation – no proof of income needed, etc.
Simply call BoA, make the first monthly payment and you’re done. In theory, that should speed up the loan mod process. One of the reasons so few trial Hamp modifications have been made permanent, supposedly, is the fact that the paperwork needed for the programme takes so long to assemble and check.
This is a quick way to get around the paperwork problem – but at what cost to the banks?
We presume the banks would only make the principal reduction offer if they thought they could make more from the homeowners’ reduced payments than they would by eventually foreclosing and selling the property themselves. Perhaps then, the banks are still betting on falling house prices. Or getting very desperate.
Either way, this is something to watch.
Related links:
Hamps across America – FT Alphaville
How banks view loan modifications – MandelMan Matters
Fed encourages principal reduction – Loan Mod
Banks bite bullet on loans – WSJ