J. Craig Anderson
The Arizona Republic
Mar. 25, 2010 12:00 AM
A decision by Bank of America's home-loan subsidiary to begin systematically lowering the principal balance on an estimated 45,000 customers' onerous mortgage loans has left some wondering if it's the start of a broader trend.
Less than 1 percent of the country's estimated 11.3 million underwater mortgage borrowers are eligible for the program, announced Wednesday, but it could spark other lenders to do likewise, one Arizona State University finance professor said.
"I think this is going to spread - that's the big news," ASU professor Herb Kaufman said.
Kaufman's former employer, government-sponsored mortgage guarantor Fannie Mae, told the Wall Street Journal on Wednesday that it was considering a similar move to cut loan balances for the most deeply troubled homeowners.
Charlotte, N.C.-based Bank of America's program would apply only to borrowers who owe more than 120 percent of their home's current market value and would be limited to those customers with certain adjustable-rate and high-interest mortgages.
Nationwide, about 25 percent of all homeowners are "underwater," meaning that they owe more than the home is worth, according to recent figures from First American CoreLogic, a real-estate data firm in Santa Ana, Calif.
In Arizona, that figure is closer to 50 percent, according to the firm's analysis.
Still, that doesn't mean Arizona homeowners should wait by the phone for their lender to call with the good news, said Tanya Wheeless, president and CEO of the Arizona Bankers Association.
"The Bank of America program is not going to help everyone, nor is it a program that is likely to be replicated," Wheeless said. "There is no groundswell."
the specter of mass mortgage default probably would prevent most lenders from slashing loan balances, the logic being that the promise of a principal reduction would encourage more borrowers to stop paying.
Even in the housing slump's darkest hours, the nation's overall default rate for home mortgages has remained in the single digits.
The national default rate was only 7 percent in the fourth quarter of 2009 despite much financial hardship and widespread anger toward lenders, according to a recent study by real-estate services firm TransUnion, based in Chicago.
The incidence of borrowers voluntarily leaving their mortgaged homes in the fourth quarter was about 24 percent, according to CoreLogic; it was almost 50 percent in Arizona.
Even with that many people walking away, either voluntarily or by force, lenders have made few changes to their loan-modification programs, Wheeless said.
Most loan modifications focus on lowering monthly mortgage payments by lowering the interest rate or stretching the repayment term over 40 or even 50 years. Bank of America acquired leading subprime lender Countrywide Financial Corp.
In many cases, the bank servicing a mortgage lacks the authority to lower its principal balance, Wheeless said, because the loan itself is backed by a private investor or another bank.
But more than anything, she said, lowering a past-due borrower's loan principal just doesn't feel right to most lenders.
"It's not something that would be accepted wholesale by the lending industry," she said.
Kaufman said he would not be surprised if the mounting political pressure to help struggling homeowners forced banks out of that comfort zone.
"There is clearly a political gain to be gotten from implementing a program like this," he said.