BofA Initiates Principal Reductions - Analyst Blog

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Homeowners having mortgages with Bank of America Corporation ( BAC ), but facing difficulties in paying their loan amounts now have a reason to cheer. BofA has started sending letters to those homeowners who have the chances of qualifying mortgage modifications as a part of the $25 billion global foreclosure settlement deal that was approved by the court in April.

BofA will be reaching out to more than 200,000 potential homeowners by mailing them the invitations to participate in the loan modification program and provide necessary financial information. The company will complete the mailing process by September-end.

BofA anticipates that on an average these modifications will lead to the principal reduction of about $150,000 each. Additionally, customers who qualify for this program will be able to bring down their monthly mortgage payments by 30%.  

Eligibility Criteria

According to BofA, in order to qualify for the program, the customers must be delinquent for more than two months as of January 31, 2012 and be underwater (value of the property less than the loan value).

Additionally, the customers must hold loans, which are either owned or serviced by BofA. Mortgages serviced by BofA for other investors that have given the company the authority to do such modifications are also eligible. Further, the homeowner must have a contractual monthly payment for principal, interest, property taxes, hazard insurance and any applicable homeowner association fees of more than 25% of total gross income.

Process to be followed for Qualification

Though borrowers receiving the letters to participate are eligible, BofA stated that it would be necessary for them to prove that they actually qualify for this program. For this, the eligible borrowers must answer the letter with full credentials of the total household income. The document must show that the borrowers would be able to make monthly payments after principal reduction.

Also, the present monthly loan payment must be more than 25% of the gross total income and the customer must prove that he/she is unable to afford that. Hence, if the borrower qualifies, BofA would reduce the monthly loan payments to 25% of the borrower's gross income.

The Story Behind

Earlier in February, BofA along with four other mortgage servicers - JPMorgan Chase & Co. ( JPM ), Citigroup Inc. ( C ), Ally Financial Inc. and Wells Fargo & Company ( WFC ) - singed a foreclosure settlement deal with 49 states' attorneys general and regulators. These banks were accused of committing foreclosure mess (flawed paperwork and the use of 'robo-signers') that led to the temporary suspension of foreclosures across the country since October 2010.

Of these five banks, BofA was required to pay the largest share of settlement amount, which is about $11.8 billion. Out of this amount, $3.24 billion will be paid to states as penalties and the remaining to the distressed borrowers.

Under the agreement, these banks are required to bring down the loan amounts of about 1 million homeowners, who are at a risk of foreclosure. They will be required to first lower the principal loan balance to 100% of the present property value. Thereafter, they would have to reduce the interest rate and additional principal (if necessary) to arrive at the intended payment.

Similar Initiatives Undertaken

BofA has already begun the principal reduction program in March by considering those homeowners who were in the loan modification review process. Till now, approximately 5,000 modification recommendations have been mailed, providing over $700 million in reduced principal. However, the homeowners must make three timely payments to make the arrangement permanent.

Additionally, BofA announced a pilot project - Mortgage to Lease - that will allow the distressed customers (related to foreclosures) to remain in their houses as the ownership of their property would be taken over by the company. Only about 1,000 homeowners will initially be the part of this program. Under the terms, the property owners will transfer the home ownership to the company and in exchange, their outstanding loan balances will be forgiven.

Conclusion

The primary idea behind the mortgage modifications is to offer a reasonable monthly payment system, which is based on borrower's capability to pay. We believe that BofA's various loan modification initiatives will help prevent foreclosures. Also, it will facilitate the revival of the housing market, which is reeling under the effects of foreclosure mess and reduction in home prices. All these have slowed down the country's economic growth, which is further compounded by higher unemployment rates.

BofA currently retains its Zacks #3 Rank, which translates into a short-term 'Hold' rating.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: BAC , C , JPM , WFC

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