The Department of Housing and Urban Development recently announced a $25 billion settlement between the five largest banks in the U.S. to address mortgage loan servicing and foreclosure abuses. The settlement includes Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. Most of the $25 billion settlement is supposed to go toward reducing mortgage payments for troubled homeowners.
There are two big ways this settlement differs from previous programs. For one, it’s the only large-scale program that includes principal reductions. Banks will be required to do partial loan forgiveness. Secondly, compliance from the lenders is mandatory, which distinguishes it from other programs that have been voluntary.
Bank of America Home Loans, one of the five major banks involved in the settlement, has purportedly been reaching out to customers who may be eligible for forgiveness of a portion of the principal balance on their mortgage under the terms of the settlement.
Bank of America began sending out letters in a targeted outreach to more than 200,000 potential candidates for this assistance. The bank estimates average monthly savings of 30 percent on mortgage payments of customers who qualify for this program.
To be eligible for Bank of America’s principal reduction program, a homeowner must meet certain criteria including:
• Owes more than the mortgage on the property is worth today.
• Was at least 60 days behind on payments on January 31, 2012.
• Has a contractual monthly payment for principal, interest, property taxes, hazard insurance and any applicable homeowner association fees totaling more than 25 percent of gross household income.
• Has a loan that is owned and serviced by Bank of America, or serviced for another investor that has given the bank delegated authority to do such modifications
Under the terms of the government settlement, the bank will strive to provide an affordable payment to qualified under-water homeowners by first reducing the principal balance to as low as 100 percent of the current property value, then lowering the interest rate and forbearing additional principal, as necessary, to reach the target payment. The settlement terms require a final calculation to determine that the cost incurred by the mortgage investor to modify the loan does not exceed the expected loss to the investor if it goes to foreclosure instead, commonly known as net present value.
It remains to be seen just how many homeowners will actually benefit from Bank of America’s principal reduction program.
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