Bank of America (NYSE:BAC) Cutting Mortgage Principal for Some Borrowers

Bank of America (NYSE:BAC) announced it will be cutting the principal of homeowners who owe above 120 percent of the value the loan they took out; up to 30 percent of the principal could be cut for borrowers.

Contrary to what many people may think, banks really don’t want foreclosures because of what it does to their quarterly and annual results, as they are placed on the books of the banks at that time, So this step is an attempt to eliminate the growing number of foreclosures by customers for Bank of America.

The bank said this could affect approximately 45,000 of its customers who already qualify for loan modification through the Home Affordable Modification Program (HAMP) program of the U.S. government. BofA also said it would cut the principal by close to $3 billion once the program is implemented.

Although this sounds good, the idea has been somewhat controversial because borrowers would benefit from the cut in principal if their houses starts rising in value again, while those offering the mortgages and services wouldn’t.

Other parameters to qualify for a principal reduction besides the loan balance being 120 percent of the value of the home are being 60 days overdue on their mortgage payment and provable financial hardships making it impossible to keep living in the home at current levels.

Even with many of the existing loan modifications, it hasn’t done a lot for many borrowers because even after the terms of the loans were changed the houses were so underwater there was little incentive for homeowners to continue paying as they believed they would never have equity in their homes again, which took away the incentive to continue making payments on them.

It has been considered better to walk away and find another place to live than to make payments with little benefit for years into the future.

A growing number of borrowers already receiving help are still defaulting on their loans, making it necessary to try other strategies to help keep them in their homes if at all possible.

In this particular program, Bank of America will work the decrease in principal over a five-year period into the mortgage to ensure they aren’t taken advantage of, while borrowers earn the right to the drop in principal by keeping their mortgage payments up to date.

This is solely for Bank of America customers, although other banks have been considering something similar.