A select group of struggling mortgage borrowers are about to get an offer that sounds too good to be true. Executives at Bank of America say they will begin mailing 200,000 letters offering certain customers mortgage principal reduction.
“If people get these things and
toss them, they won’t be eligible,” says Ron Sturzenegger, the Bank of
America executive charged with providing solutions to borrowers in need
of mortgage assistance.
But the offer is real, and eligible
borrowers could get as much as $150,000 knocked off the balance of
their mortgages. It is all part of the $25 billion settlement reached
this year between federal and state agencies and the nation’s five
largest mortgage servicers over fraudulent foreclosure document
processing (so-called “robo-signing”).
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Bank of America (BAC),
in a deal with state attorneys general and the U.S. Department of
Justice, committed $11 billion to mortgage principal reduction, but
executives say they will go beyond that if enough borrowers respond to
their offer. Five thousand borrowers have already received a collective
$700 million in principal reduction through a pilot program for those
already in a modification negotiation. The 200,000 borrowers being
targeted now may have already exhausted modification options or may
have yet to contact the lender.
Executives say borrowers
receiving the letters are eligible, but they still have to prove they
qualify. In order to be eligible, a borrower must be 60 days late on
the mortgage payment as of Jan. 31, 2012. The borrower has to owe more
on the mortgage than the home is currently worth, commonly known as
being “underwater” on the mortgage, and the borrower’s loan must either
be owned by Bank of America or serviced by Bank of America for an
investor who is allowing the modifications.
In order to qualify
for the modification, the borrower must answer the letter with full
documentation of income, showing that under the terms of the
modification they can still make the monthly payment. A borrower with
no income would therefore not qualify. A borrower’s current monthly
payment must be more than 25 percent of gross income, and the borrower
must show they are unable to afford that.
“If you can afford to
make your monthly payment and are choosing not to, you will not get
this principal modification,” says Sturzenegger.
If the borrower
qualifies, Bank of America will bring the monthly mortgage payment down
to 25 percent of the borrower’s gross income. That could mean principal
forgiveness well over $100,000, as there is no limit to the amount of
the mortgage. If enough borrowers respond, it could cost Bank of
America far more than it committed to in the settlement.
“Yes, we have the capability to go well beyond the $11 billion,” adds Sturzenegger.
executives say that before choosing which borrowers will get the offer,
they performed a net present value test on each loan, making sure that
the principal reduction modification would net Bank of America or the
investor who owns the loan more than foreclosing on the home. “It has
to be fair to the investor as well,” says Sturzenegger.
of the 200,000 borrowers who receive the letters are expected to
respond. Executives say there is a level of fatigue among delinquent
borrowers who have already received several notices or who may have
gone through a failed modification process already. Some borrowers
simply don’t want to stay in their homes, while others may think the
offer is a scam.
“They have been contacted by a lot of other people, and this offer may appear too good to be true,” says Sturzenegger.
why Bank of America is sending the letters by certified mail and trying
to make the language as simple as possible. A sample letter obtained by
CNBC shows a bring red box in the top corner labeled, “IMPORTANT” and
simple language stating, “Qualifying customers may reduce their monthly
payment by an average of 35 percent.”
Some 6,500 letters should
be arriving in mailboxes across the country this week, with a wave of
new letters going out every week until the end of the summer, when all
200,000 should have been mailed. Bank of America is staggering the
mailings in order to handle the expected response. The bank has staffed
up to handle the task, with 50,000 employees manning servicing desks,
but the process will clearly take a lot of time. That’s why Bank of
America has suspended any foreclosure actions against these 200,000
borrowers until the process is complete.