Bank of America Announces it May Cut Some Mortgages

The news was, well, let’s just say shocking. Bank of America announced  that it would be one of the first banks that will willingly look at its subprime and adjustable rate mortgages in an effort to help make them more affordable for thousands of homeowners. This level of home loan modification is uncommon for major loan servicers like Bank of America and could change the playing field for all involved.

Pressure building

The pressure that has come from President Obama’s Administration has been building throughout the past year and is culminating in this new approach. The idea of working with homeowners to help them stay in their homes is a basis of the administration’s efforts. Foreclosure prevention is an important aspect to helping not only the economy, but also the entire housing industry.

Yet housing experts tend to agree that when homeowners are underwater with their mortgages, meaning they owe more than their home is worth, they are more likely to walk away from their mortgages. According to First American CoreLogic, nearly 25% of homeowners with a mortgage are considered underwater.

Enticing borrowers

Bank of America is attempting to quell the rash of foreclosures in its ranks. After all, banks lose money when a homeowner, or borrower, defaults on their mortgage. Therefore, it makes fiscal sense, especially in this depressed housing market, to avoid as many foreclosures as possible. Currently, most banks when seeking to modify home loans look at the interest rate or length of the term of the loan as a way to help save money for the homeowner.

This has been effective but only to a limited extent. With so many homeowners being underwater, banks need to do more to look at reducing overall balances, based on the home’s current value. Bank of America will look at reducing these balances for borrowers with subprime, prime 2-year hybrid ARM, and Pay-Option ARM loan. Their target will be to help the borrower reach a payment that is 31% of their pre-tax income.

Just or just smoke?

The argument about these efforts can come from all sides. For pragmatists, the idea of keeping homeowners in their home is noble, and it will undoubtedly help the housing industry eventually climb out of the deep depression it has fallen in. On the other hand, these homeowners who purchased homes under these terms could be considered investors and investing has risk attached to it.

The larger question that is being raised here is about equality and equity. If Bank of America is doing this to appease the current administration in light of the massive government bailout that it received, then it’s eating its just desert. However, the question should be raised with regard to what Bank of America will do for potential borrowers looking to buy a home during this current depressed housing market.

The lending standards have become so tight that many would-be homebuyers are left out in the cold. Potential borrowers who would normally easily manage a mortgage for a home today are often turned away due to a lack of sufficient down payment or less-than-stellar credit ratings. If these current struggling homeowners are now looking at help from the public and the private sector, then it certainly raises the question about why these banks and financial institutions are slow to open the credit floes.

Banking on the future

It’s noble what Bank of America is offering to do, but there’s little doubt that it wouldn’t be doing so without pressure from the current Administration. Is it enough? Unlikely. In order to positively affect the current housing market, willing borrowers who have been turned away, who would be more than capable to handle a mortgage, need to be considered.

The recession has affected millions of people and their credit ratings have dropped significantly. Many of these issues are simply temporary and until the banks are willing to look beyond the numbers, until they are willing to step beyond the pressure the government places on them, until they take a new and legitimate chance on the next generation of homebuyers, all the efforts they announce will still leave millions on the outside looking in.

David

David Reinholtz is a professional Mortgage expert in Real Estate Industry.David is also a sales and marketing expert and trains professionals in every career field. David has personally trained tens of thousands of loan officers, mortgage brokers, real estate agents and individuals through The Close More University Seminar Series, LoanOfficerSchool.com Classes, Correspondence and On Line Learning, and countless private engagements and training events throughout the country.

David is the Founder and CEO of LoanOfficerSchool.com, an approved education provider for The Conference of State Bank Supervisors and The National Mortgage Licensing Systems' (NMLS) required pre-licensing education and continuing education.