Principal Reduction: A Step Forward by BofA, Wells Fargo

Editor’s Note: Better late than never. It is a step in the right direction, but 30% reduction is not likely to do the job, and waiting for mortgages to become delinquent is simply kicking the can down the road.

The political argument of a “gift” to these homeowners is bogus. They are legally entitled to the reduction because they were defrauded by false appraisals and predatory loan practices — fueled by the simple fact that the worse the loan the more money Wall Street made. For every $1,000,000 Wall Street took from investors/creditors they only funded around $650,000 in mortgages. If the borrowers performed — i.e., made their payments, Wall Street would have had to explain why they only had 2/3 of the investment to give back to the creditor in principal. If it failed, they made no explanation and made extra money on credit default swap bets against the mortgage.

For every loan that is subject to principal reduction, there is an investor who is absorbing the loss. Yet the new mortgage is in favor of the the same parties owning and operating investment banks that created the original fraud on investors and homeowners. THIS IS NO GIFT. IT IS JUSTICE.

—-EXCERPTS FROM ARTICLE (FULL ARTICLE BELOW)—–

New York Times

Policy makers have been hoping the housing market would improve before any significant principal reduction program was needed. But with the market faltering again, those wishes seem to have been in vain.

Substantial pressure came from Massachusetts, which won a significant suit last year against Fremont Investment and Loan, a subprime lender. The Supreme Judicial Court ruled that some of Fremont’s loans were “presumptively unfair.” That gave the state a legal precedent to pursue Countrywide.
The threat of a stick may be helping banks to realize that principal write-downs are in their ultimate self-interest. The Bank of America program was announced simultaneously with the news that the lender had reached a settlement with the state of Massachusetts over claims of predatory lending.

The percentage of modifications that included some type of principal reduction more than quadrupled in the first nine months of last year, to 13.2 percent from 3.1 percent, according to regulators.

Wells Fargo, for instance, said it had cut $2.6 billion off the amount owed on 50,000 severely troubled loans it acquired when it bought Wachovia.

March 24, 2010

Bank of America to Reduce Mortgage Balances

By DAVID STREITFELD and LOUISE STORY

Bank of America said on Wednesday that it would begin forgiving some mortgage debt in an effort to keep distressed borrowers from losing their homes.

The program, while limited in scope and available by invitation only, signals a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure. It comes as banks are being urged by the White House, members of Congress and community groups to do more to stem the tide.

The Obama administration is also studying whether to provide more help to people who owe more on their mortgages than their homes are worth.

Bank of America’s program may increase the pressure on other big banks to offer more help for delinquent borrowers, while potentially angering homeowners who have kept up their payments and are not getting such aid.

As the housing market shows signs of possibly entering another downturn, worries about foreclosure are growing. With the volume of sales falling, prices are sliding again. When the gap increases between the size of a mortgage and the value that the home could fetch in a sale, owners tend to give up.

Cutting the size of the debt over a period of years, however, might encourage people to stick around. That could save homes from foreclosure and stabilize neighborhoods.

“Banks are willing to take some losses now to avoid much greater losses later if the housing market continues to spiral, and that’s a sea change from where they were a year ago,” said Howard Glaser, a housing consultant in Washington and former government regulator.

The threat of a stick may be helping banks to realize that principal write-downs are in their ultimate self-interest. The Bank of America program was announced simultaneously with the news that the lender had reached a settlement with the state of Massachusetts over claims of predatory lending.

The program is aimed at borrowers who received subprime or other high-risk loans from Countrywide Financial, the biggest and one of the most aggressive lenders during the housing boom. Bank of America bought Countrywide in 2008.

Bank of America officials said the maximum reduction would be 30 percent of the value of the loan. They said the program would work this way: A borrower might owe, say, $250,000 on a house whose value has fallen to $200,000. Fifty thousand dollars of that balance would be moved into a special interest-free account.

As long as the owner continued to make payments on the $200,000, $10,000 in the special account would be forgiven each year until either the balance was zero or the housing market had recovered and the borrower once again had positive equity.

“Modifications are better than foreclosure,” Jack Schakett, a Bank of America executive, said in a media briefing. “The time has come to test this kind of program.”

That was the original notion behind the government’s own modification program, which was intended to help millions of borrowers. It has actually resulted in permanently modified loans for fewer than 200,000 homeowners.

The government program, which emphasizes reductions in interest rates but not in principal owed, was strongly criticized on Wednesday by the inspector general of the Troubled Asset Relief Program for overpromising and underdelivering.

“The program will not be a long-term success if large amounts of borrowers simply redefault and end up facing foreclosure anyway,” the inspector general, Neil M. Barofsky, wrote in his report. One possible reason is that even if they get mortgage help, many borrowers are still loaded down by other kinds of debt like credit cards.

Bank of America said its new program would initially help about 45,000 Countrywide borrowers — a fraction of the 1.2 million Bank of America homeowners who are in default. The total amount of principal reduced, it estimated, would be $3 billion.

The bank said it would reach out to delinquent borrowers whose mortgage balance was at least 20 percent greater than the value of the house. These people would then have to demonstrate a hardship like a loss of income.

These requirements will, the bank hopes, restrain any notion that it is offering easy bailouts to those who might otherwise be able to pay. “The customers who will get this offer really can’t afford their mortgage,” Mr. Schakett said.

Early reaction to the program was mixed.

“It is certainly a step in the right direction,” said Alan M. White, an assistant professor at Valparaiso University School of Law who has studied the government’s modification program.

But Steve Walsh, a mortgage broker in Scottsdale, Ariz., who said he had just abandoned his house and several rental properties, called the program “another Band-Aid. It probably would not have prevented me from walking away.”

Even before Bank of America’s announcement, reducing loan balances was growing in favor as a strategy to deal with the housing mess. The percentage of modifications that included some type of principal reduction more than quadrupled in the first nine months of last year, to 13.2 percent from 3.1 percent, according to regulators.

Few of these mortgages were owned by the government or private investors, however. Banks tended to cut principal only on mortgages they owned directly. Wells Fargo, for instance, said it had cut $2.6 billion off the amount owed on 50,000 severely troubled loans it acquired when it bought Wachovia.

Bank of America said it would be offering principal reduction for several types of exotic loans. Some of the eligible loans are held in the bank’s portfolio, but the program will also apply to some loans owned by investors for which Bank of America is merely the manager.

The bank developed the program partly because of “pressure from everyone,” Mr. Schakett said. Even the investors who owned the loans were saying “maybe we should be doing more,” he said.

Substantial pressure came from Massachusetts, which won a significant suit last year against Fremont Investment and Loan, a subprime lender. The Supreme Judicial Court ruled that some of Fremont’s loans were “presumptively unfair.” That gave the state a legal precedent to pursue Countrywide.

“We were prepared to bring suit against Bank of America if we had not been able to reach this remedy today, which we have been looking for for a long time,” said the Massachusetts attorney general, Martha Coakley.

Bank of America agreed to a settlement on Wednesday with Ms. Coakley that included a $4.1 million payment to the state.

Reducing principal is widely endorsed, in theory, as a cure for foreclosures. The trouble is, no one wants to absorb the costs.

When the administration announced a housing assistance program in the five hardest-hit states last month, officials explicitly opened the door to principal forgiveness. Despite reservations expressed by the Treasury, the White House and Housing and Urban Development officials have continued to study debt forgiveness in areas with lots of so-called underwater homes, according to two people with knowledge of the matter.

On a national scale, such a program risks a political firestorm if the banks are unable to finance all the losses themselves. Regulators like the comptroller of the currency and the Federal Reserve have been focused on maintaining the banks’ capital levels, which could be hurt by large-scale debt forgiveness.

“You have to be very careful not to design a program that would change people’s fundamental behavior across the country in a destabilizing way or would be widely perceived as unfair to people who are continuing to pay,” Michael S. Barr, an assistant secretary of the Treasury, said early this year.

Policy makers have been hoping the housing market would improve before any significant principal reduction program was needed. But with the market faltering again, those wishes seem to have been in vain.

Bank of America’s announcement came within hours of a fresh report that underscored the renewed weakness. Sales and prices are dropping, leaving even more homeowners underwater.

Sales of new homes fell in February to their lowest point since the figures were first collected in 1963, the Commerce Department said. Sales are about a quarter of what they were in 2003, before the housing boom began in earnest.

“It’s shocking,” said Brad Hunter, an analyst with the market researcher Metrostudy. “No one would ever have imagined it would go this low.”

14 Responses

  1. By the way, after going to several lawyers regarding our case, I always felt as though they were on the other side…pushing for a shortsale. Unfortunately, even some on Neil’s list. Are they spying on us?

    I finally found an attorney in Los Angeles with a large law firm that is AWESOME and VERY reasonably priced… all inclusive, no extra fees and crap…just flat fee and he knows what he’s talking about. I just wanna give him a hug. He’s a bankruptcy attorney, however if we need to push the issue with the banks further and they won’t work with us, we’ll do so after BK… also very reasonably priced. Feel free to contact me at Kelly@Take2Creative.com and I’ll be happy to refer you to him. Please note that he doesn’t do loan modifcations.

  2. Did anyone notice that Wells Fargo and others jumped on the wagon right away… looks good for publicity, eh? Go Wells Fargo! What a joke…

    However, as far as I’ve seen, Wells Fargo only jumped so far as to reduce principle on Home Equity or Second Mortgages. How, funny… when in California I can get rid of my second all together in Chapter 13, which is what a lot of people are doing.

    Wells Fargo is trying to look like the good guys in all of this, when in actual fact they are trying to avoid more losses.

    I’d be curious to know if anyone has received an ACTUAL principle reduction, or a TRUE loan modifcation from Wells Fargo unrelated to an ARM…just for having a securitized loan filled with fraud. Mine is a 10-year interest-only…we bought in 2007 and we are way underwater. If they don’t do anything about the principle, or getting our payments lower to include principle, then when the 10 years kicks in, we’ll be screwed. I’ve been trying to get a loan mod from them since July of last year… now in a “Special Forbearance” which we all know is a scam in itself.

  3. Robert Ponte-

    Agree – too little too late. Many have been lost but and will never recover. But many are still in court – and many will come. Courts are tough about the law – and technicalities will get you dismissed – have to be prepared.

    Also, anyone who has been a victim of foreclosure can reopen case if it is believed there has been “fraud upon the court.” If the wrong party filed the complaint, or submitted false documents – this is “fraud upon the court.”

    Disclaimer – not an attorney – only for education purposes and not as legal advise.

  4. This may help a few but is it to little to late. And what about people who’s homes are underwater and still making payments on mortgages that exceed the value of the property and mortgage. This is a step in the right direction and thanks to Neil again for getting this out there. I also have found a group that can do mortgage settlement for thirty cents for less on the dollar. Call Robert Ponte to find out more. 860-599-5557

  5. Ian

    I think you are giving the Fed too much credit – they are not that smart. The TILA is one of few consumer protection laws. Senator Boxer is the author of the amendment – she called it a “no-brainer” – that consumers have a right to know their creditor.

    The TILA’s definition of Creditor is:

    (17) Creditor means:

    (i) A person (A) who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and (B) to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract.

    Now, there is District Court case law that says in order to be the creditor – BOTH elements of the TILA definition must be met. Due to securitization, the Fed felt the need to expand the definition of Creditor and used the term “covered person” in it’s Interim Opinion. If the Fed were to expand the definition of creditor to include security investors – they would be, in effect, rewriting the TILA. We have no agreement with security investors – the bank does – not the borrower.

    If you were to rescind the loan under the TILA, I do not think any judge would allow a trust/trustee or security investors to be named as the creditor. This is why judges have to find other ways to toss out rescission (such as ability to pay and statute of limitations) because no judge would ever want to write a decision that changes the TILA definition of creditor.

    The Federal Reserve gave support to the conclusion that pass-throughs and REMICs investors are not “covered persons” by the creditor definition. And, to support their conclusion, they introduce balance sheet accounting (for which no trust/trustee has). The Fed had no other choice –

    Interestingly, the case – posted on this blog- by the Federal Home Loan Bank in CA – which is suing certain entities – is asking for rescission of the contract. This is different than TILA rescisssion (also discussed on this blog). The damages the FHLB is asking for are calculated with the intent of restoring FHLB to it’s prior position – as if the original contract never existed. If, as security investors, the FHLB had an ongoing interest in “pending” foreclosures – they could not rescind the contract without including this in recovery for damage calculation – they do not. Fact is they have no interest in pending foreclosures – and damages does not factor into their rescission calculation.

    TILA is TILA – and it has not been rewritten to include investors in pooled receivables as your creditor. If courts were forced to reconcile TILA and rescission and foreclosure – this would be a problem. See no case that does this – at least not yet.

    Disclaimer – I am not an attorney and this is not meant to be construed as legal advise and only for educational purposes.

  6. Anonymous- thanks for the input on my timeline question. Playing the devil’s advocate, I am wondering, if, while writing the TILA 2009 language to enable borrowers to more easily identify their creditors, the Fed didn’t just throw us all a curve. I haven’t read the TILA amendments, or the proceedings and discussions leading to the amendments, but if they got it in their heads that identifying the bondholders of the securitized loans as creditors would, as Neil has stated all along, open the floodgates- for 50% principal reductions, predatory lending charges, illegal (undisclosed to the borrower) fees, kickbacks ad nauseum. So maybe in actuality the investors ARE the creditors/lenders. Why would they single out the ONE THING by which the banks would stand to lose trillions, and tens of thousands of employees given a fair trial and then shot? It seems too coincidental- “well, we are meeting here today to reform (there’s that word again) the TILA to help out beleagured borrowers identify their lenders, and oh, by the way, the lender is never the investor? By having investors purchase shares of loan pools which were loan-specific yet empty (NO LOANS IN THEM) why would they need a warehouse lender, if they were getting paid in full and then some prior to funding one loan? Anyone else stuck on this?

  7. Tony

    Completely agree.

  8. I hope no takes this reduction from BofA as something good.

    Now if you just want to stop fighting them and this sounds good for you then all means take the deal. This is just like a debt collector of credit card debt. The debt was set-off and sold to some debt collection agency for penny’s on the dollar. They say they can work a sweat deal with you to cut your payments down to something you can work with. They give you a amount and you are like cool. They say they just need you to sign this new contract stating the new terms.

    What you don’t understand is that, they never had a contract with you to begin with (or not anymore when it comes to mortgages, because they sold off the note as non-recourse) and you just made them a new legal contract to work with and a new paper trail.

    A 90+ defaulted loan is not in the trust anymore and now these servicer are rehashing old product to re-securitize all over again.

    Don’t fall for the all trick of rehash.

  9. This program is ONLY FOR BofA PORTFOLIO loans!!!!!

    If a loans qualifies, it will have to go through HAMP which is only approving 1 in 100 apps.!!!! Suffice, this is a good political message, but it will never work.

    If you want real reform…………….Open bankruptcy court, and allow CRAM DOWNS under 7 & 13. Problem solved!

  10. Bob

    Good point. And why is BofA not getting “investor” approval if the loan is still in the trust?? One caveat for the program is that the borrower must be delinquent – why? because that is when the loan is removed from the “pool.”

    Also, the 30% is over a period of 5 years.with the stipulation that if home prices improve and equity is recovered – then they will take the equity.

    Bad deal. Yet hearing congressmen praise BofA. Need big action to go after all the fraud from the onset.

  11. 30% huh? Banks don’t give anything for free. I expect another 25-30% decline in property value before it is all over. Won’t that just even out the scales.

    $250 K value today when it is all said and done will actually be $175K after the decline. So homeowners agree to a new contract at $200K and they are still $25K under water. Don’t think the banks haven’t already figured in the [yet to be realized] decline coming. What am I missing here?

  12. WF bought Wachovia for 5 cents on the dollar using
    15 billion of the 25 billion Tarp money they received
    from the US government. What a sweet deal! WF is a
    well run company and when you put “candy in front of
    a baby”, well you know the story!
    I believe BOA bought Countrywide at a similar huge
    discount. Most of the CW paperwork is all screwed up
    so BOA can’t even foreclose. So what do they do? Simple, offer a new discounted Note to replace the
    old (unenforcible Note). They call this a “modification”.
    One cannot blame BOA for trying to maximize profits
    on the CW deal, but the gullible sheeple need to see
    if they own their property free and clear before caving
    in to Mr. Wolfstein’s threats of foreclosure. Same goes
    for WF.

  13. What is conflicting is that MBS created VAPOR MONEY, that is non_ exsistant.Mortage princible reductions will have to be across the board, regardless of LTV ratio along with a freeze on interest rates for 5 years. Until then we will continue to spiral down into a deeper abyss of rising unemployment and further devaluation of property.

  14. I keep seeing conflicting messages here at Livinglies.

    The message I best understand, prefer, and agree with, is that in those few, and increasing cases where the judge has listened, and justice been truly served, the homeowners get the house free and clear since there is no legitimate holder-in-due-course.

    Why then do you give any credit (“Better late than never”) to any these Principal Reduction schemes, unless it is reduction to zero. You say “THIS IS NO GIFT. IT IS JUSTICE”, but also mention that it just reloads the banks again. Why so wishy-washy Neil?

    This isn’t Justice at all, it’s the bankers game you’re supporting.

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