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Loan Principal Reduction for Certain Groups

Written By:
March 17, 2011 at 12:32 AM

As U.S. bank regulators get closer to lowering the boom on many multi-national bank lenders some of the big mortgage giants such as Bank of America are launching self-imposed mortgage principal reduction programs in an effort to keep regulators at bay.

Last week Bank of America said it would reduce mortgage loan balances for military borrowers once they leave active duty, which appeared to more of a “good faith” way of flying under the radar. The announcement comes on the heels of J.P. Morgan Chase and Co. military mortgage relief program, which will launch April 1.

On Thursday, the mega-giant bank announced it would slash military customer’s mortgage to as low as 100% of their home’s current market value and consider reducing mortgage interest rates to as low as 4%.

Terry Laughlin, executive vice president/Bank of America says in a statement that Bank of America officials are launching the efforts to, “address the heavy burden of financial matters at home that can weigh on those who are protecting our freedoms.”

Although the gesture provides a good will attempt to help America’s troops, in reality the effort will only apply to approximately 1,000 loans--the number of loans it continues to hold. However, a Bank of America spokesman adds that B0fA continues to work with the investors who hold approximately 75% of its other mortgages including Freddie Mac and Fannie Mae.

In addition to its military program Bank of America has also agreed to reduce the principals for underwater borrowers in Arizona as part of the federal Hardest Hit Program (in addition to possible efforts in Washington, California and Nevada).

Will Bank of America’s Military Mortgage Program Help, Hurt or Do Nothing?

According to Wells Fargo & Co. chief executive officer, John Stumpf, the Bank of America plan may not only be ineffective but could end up hurting the mortgage industry in the long run.

During the Citigroup Inc. Financial Services Conference Stumpf said that Bank of America’s actions could have a “huge impact” on Fannie and Freddie and could motivate homeowners to default on their mortgage loan in an effort to get a better rate or deal. He believes that the impact on Freddie and Fannie could dig the country deeper into deficit.

He says, “It makes no sense to (entice) people not to pay their debts.” Stumpf notes that his bank has forgiven $4 billion in mortgage loan principal already for former Wachovia Pick-A-Payment borrowers.

Other mortgage analysts and politicians believe that Bank of America’s program, while well meaning, may come a little too late.

For example, Bob Filner, D-Chula Vista says that while he applauds Bank of America’s efforts to “be responsible” he contends in a Union-Tribune article, “They broke the law. Rather than face the consequences, they announce this.”

Is Principal Reduction for Military Borrowers The Answer?

On one hand, principal reduction or mortgage forgiveness will alleviate some of the burden underwater mortgage loan homeowners are experiencing. According to CoreLogic, more than 11 million (nearly 25%) of all U.S. homes are considered to be “underwater,” meaning that the borrower owes more on the property than it is worth.

However, is serving only a small group the right move? According to Bank of America chief executive officer, Brian Moynihan, principal reduction becomes a fairness issue. He says, "When you start helping certain people and don't help other people, it's going to be very hard to explain the difference."

Bank of America has also stated that mortgage principal reduction is valuable to use in “certain situations and for specific borrower groups.” Frahm says, “We do not advocate for principal reduction as a broad-based solution.”





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