Realty Check

Will Treasury Adopt a Mortgage Plan Like BofA's?


It seems somehow poetic to me that on the very day the TARP watchdogs (sorry, Office of the Special Inspector General for the Troubled Asset Relief Program) releases a report that just rips the Treasury's $75 billion Home Affordable Modification Program, Bank of America announces it will begin writing down principal on thousands of loans.


On top of that, in an interview on CNBC this afternoon, Bank of America's chief of foreclosure mitigation told me:

"We have been talking to Treasury, other large services have been talking to Treasury about programs similar to this for quite some time. I think the Treasury is close to deciding whether or not they want to go forward with a program like this...definitely they have it on their radar screeen.  They know they need to do things to approve acceptance rate also, and this is a way that most people believe might do the most to improve the acceptance rate."

As you probably know, the Treasury program does not require principal write down although it does encourage it. Most of your mortgage analyst types claim that the failure of HAMP is largely due to overwhelming negative home equity nationwide.

So Bank of America , saddled with millions of those lovely loans from Countrywide, and under quite a bit of legal force from the Massachusetts Attorney General, Martha Coakley, announces that for some of the most heinous troubled loans (read subprime and pay option ARMs) it will start reducing principal as a first, rather than last resort.

BofA Changes Plan for At-Risk Mortgages

Look, the fact is that 25 percent of borrowers nationally are underwater on their loans, and when you go to states like Nevada, that hits 70 percent, Arizona, 51 percent, Florida, 48 percent. I could go on, but you get the picture.

According to the TARP watchdog report: Re-defaults resulting from negative equity, including strategic defaults, may be a factor as borrowers decide that it makes more economic sense for them to walk away from their mortgages notwithstanding lower payments.

This new Bank of America program is so targeted that it will only apply to about 45,000 customers. It's only for, "certain subprime and Pay-Option adjustable rate mortgages (ARMs)."

So no 30-year fixed borrowers. In fact really no prime borrowers. Did I mention that prime loan delinquencies are currently rising at a higher rate than any other loan product?

It is also an earned forgiveness program, so borrowers have to keep current on their payments for five years to get the full benefit.

"It also recognizes and addresses the interests of mortgage investors by ensuring that forgiveness is tied to the homeowner's performance, reducing the probability of a future default under the modified terms," says Barbara Desoer, president of Bank of America Home Loans in the press release.

The reason this program is so important, though, is because we know something is in the works over at Treasury to do something like it. We may even get news of that later this week, according to some of my sources. Treasury did give us a statement in reaction to the Bank of America news:

“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.”

This now opens the floodgates to the "moral hazard" argument. I know it because every time I write about it, you all flood the blog. Let's start the debate with a great mortgage industry analyst Howard Glaser:

"Its a tricky issue politically if the federal government gets involved because the home buyer, the home owner who is paying their mortgage on time is going to look at their neighbor who is getting a cut in their mortgage and be upset about that."

"But you know, here's the thing they have to remember as well: If your neighbor is foreclosed upon and that home is sold in a distressed sale, your home value goes down too. So does the whole community. So by keeping people in their homes, everyone benefits, not just those who are at risk of foreclosure."

Questions?  Comments?