After Bank of America announced its new mortgage modification program that offered principal forgiveness for certain types of loans, I wondered if it was the only bank to do so. Of the four major loan servicers on the HAMP program -- Bank of America, JP Morgan Chase, Wells Fargo Bank and CitiMortgage -- Chase is the only one to tell me that it "doesn't offer principal forgiveness as part of a mortgage modification at this time, but continues to review all possibilities."
Chase is the second largest servicer based on the February 2010 report on the Home Affordable Modification Program (HAMP), Chase has completed the second highest number of modifications -- 171,317. Bank of America held the number one spot in February with 261,216 modification. Wells Fargo came in third with 139,065 modifications and CitiMortgage was last on the list, with 129,383 modifications. These modification numbers include both trial and permanent modifications. So far, only 168,708 modifications are active permanent modifications. All other servicers are well below 100,000 in loan modifications.
When announcing the new program, Barbara Desoer, president of Bank of America Home Loans said, "Bank of America has found that many homeowners who owe considerably more on their mortgages than their homes are worth are reluctant to accept a solution that addresses only the amount of the payment without an accompanying reduction in the balance due on the loan." She added that by "addressing the significant underwater condition" of eligible loans, "the rates of customer acceptance of HAMP trial modifications and conversions to permanent modifications on those loans will be improved, and the homeowners will be more motivated to make payments, yielding more sustainable modifications."
Clearly Bank of America is not the only servicer that has figured this out. Kevin Waetke, Assistant Vice President of Wells Fargo Home Mortgage told me by email, "When Wells Fargo merged with Wachovia at the end of 2008, we gained an option ARM portfolio for which we have been using principal forgiveness as one method, among many, to help these customers remain in their homes. Through the fourth quarter of 2009, Wells Fargo modified more than 52,600 Wachovia Pick-A-Payment loans, and did principal reductions totaling more than $2.6 billion."
Robert Julavits, of Citi Public Affairs told me by email, "Citi's goal is to keep customers in their homes by reducing monthly payments to affordable levels. In most cases, an affordable payment can be obtained by interest-rate reduction, term extension and/or forbearance. Citi does reduce principal for borrowers on a case-by-case basis after other options to address affordability are exhausted." Obviously Citi sees principal reduction as a last resort, rather than early in the process as Bank of America now plans do to. This likely results in principal reduction offers less frequently than Bank of America and Wells Fargo, but at least it's on the table. Citi did not give any details about how many homeowners have received a reduction in principal.
The Treasury Department applauded Bank of America's move. An administration official told me by email, "We are encouraged that Bank of America is taking new steps on mortgage relief for struggling borrowers. Their new initiative can reinforce our broader efforts to provide relief to homeowners and is consistent with our own housing policy principles. We will continue to identify new ways to refine and improve these programs, and urge other banks to move ahead as well."
The House Domestic Policy Subcommittee held a hearing on HAMP earlier in March. One of the key proponents of using principal reduction as a tool to successful mortgage modification is Ocwen Financial Corporation President Ronald Faris. He testified before the committee hearing and said, "Principal reduction modifications are needed to overcome the 'negative equity' problem. This is a primary driver of defaults on mortgages and re-defaults on modified mortgages ... In Ocwen's experience, negative equity [when more is owed on the home than it's worth] increases the chance of a re-default by 1.5 to two times. Approximately 15% of all of our loan modifications have involved some element of principal reduction."
Clearly the evidence is in and banks are finally listening to those who found that principal reduction for a home with "negative equity" is a critical tool to a successful modification.
If you do own a home with significant "negative equity," be sure to ask for consideration for a principal reduction as part of your HAMP modification. Bank lobbyists have fought to stop any cramdown (reduction of principal) as part of the bankruptcy law, but now seem to realize they don't have a choice for those with a significant loss in the value of their home.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The 250 Questions You Should Ask to Avoid Foreclosure.
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