Bank’s Offer to Slash Mortgages Gets Surprise Response

Bank of America repeated a promise to reduce its inventory of delinquent mortgages by 300,000 in the next 12 months.

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The bank, which reported quarterly earnings Wednesday, currently services about 1 million delinquent loans, thanks to its takeover of Countrywide Financial in 2008.

Bank of America is trying to modify troubled loans using principal reduction, but it's seeing surprisingly poor results.

As part of the $25 billion mortgage servicing settlement over so-called “robo-signing,” it announced in May that it would begin sending out letters to borrowers, offering an average $150,000 reduction in their loan balances. Of the 60,000 that went out in the first mailing, more than half went unanswered.

“In the early going, the early response rate was lower than our expectations and our expectations were fairly modest on the program,” said Bank of America spokesman Rick Simon. “We are somewhat concerned that people are not taking the offer seriously, or that people are just tired of the whole process. This is something we want them to look at because it’s a much more streamlined process than HAMP [the government’s Home Affordable Modification Program] and could be the one that is the real home saver for people.”

Bank of America intends to send these offers to a total of 200,000 borrowers who are at least two months behind on their mortgage payments and owe more than their homes are worth. Loans that are owned by Fannie Mae and Freddie Mac are not eligible.

The bank is sending out reminders every two weeks and is now making changes to the letters, trying to improve the response rate. Originally, the offer was to be extended for 45 days, but that, too, may be stretched in order to get more borrowers on board.

As for the promise to reduce the number of bad loans it services by 300,000, Simon said Bank of America is relying on other strategies as well, like selling off the bad loans to investors and transferring servicing to other companies. The number is also coming down because the inflow of bad loans is tapering off.

“The delinquency inflow has dropped as the economy seems to be getting a little bit better,” Simon said. “For every loan remodified, we are down now to where loan delinquencies are dropping because there’s no inflow.”

Bank of America reported it set aside $1.8 billion in the second quarter of this year to cover bad loans. That’s down 46 percent from a year ago and the lowest level since Q1 of 2007.

— By CNBC's Diana Olick

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