BofA’s Home Mortgage Modification Plan Makes Homeowners See Red

Bank of America announced today a loan modification plan in response to growing pressure to do more to help resolve the housing problem and clear the market of foreclosed properties.  The announcement is important here in California where an alarming percentage of home owners are underwater owing more on their mortgages than their houses are now worth.

So far the banks have done very little to help solve this problem and now risk that many homeowners will just give up and throw the keys on the table and walk away.  BofA is particularly annoying since it aggressively markets new home loans to its customers especially those with adjustable rate mortgages.  But after teasing the homeowner with the prospect of a restructured loan its slams the door shut by telling virtually everyone it calls that they don’t have enough equity to refinance unless they bring money to the table.

California is a nonrecourse state and lenders who are seen as unhelpful in these difficult times face great risks of being stuck with lots of foreclosed properties.  While B of A inherited this mess because it was squeezed by the Federal Government to buy out Countrywide, it has a dismal track record in loan modifications as do many other major loan servicers.

The new BofA plan is likely to outrage many Californians who have struggled through the recession and long periods of unemployment to stay in their homes and keep up with their payments.  But the new BofA plan offers to reduce the principal balance on mortgages by up to 30% ONLY for borrowers who are more than 2 months late on their payments.  Make your payments and do the right thing and BofA’s attitude is keep it up buddy!

Contrast that to home equity loan holders who face even greater risks since they are in line for repayment after the first mortgage holder in a foreclosure so they have been working overtime to make deals with HELOC holders still current on their payments to offer write downs of the notes as much as 50% in exchange for a lump sum payment of the balance or a restructured but more secure personal loan note.  It’s working to help clear the market and save their backsides by monetizing their portfolio by working with homeowners willing and able to keep paying.

The housing problem is a big reason for lack of confidence in the economy and along with stubbornly high unemployment means the recession will be technically over long before it feels like it on Main Street.

Strategic default may be a common strategy in the business world but it is a new sober reality facing many homeowners today.  Keep paying or walk away?  In nonrecourse states it is becoming a more attractive options and an improving economy may actually accelerate the numbers of defaults.

BofA’s new loan modification plan is asking for trouble since anyone getting a new job out of state faced with a big mortgage, an unhelpful banker, and a house underwater with no equity left to save may just walk away.

It seems like a crazy way for any bank to do business to me—and for this they probably will get a big bonus!