Calculated Risk has a fascinating and detailed look at an UNSOLICITED Principal Reduction Loan Modification (pdf) offer from BofA.

A few background details:

  • The homeowner bought the house in May 2005 for $420,000.
  • The homeowner refinanced in March 2006. This included a negatively amortizing adjustable rate mortgage (NegAM ARM) first with BofA for $392,000, and a 2nd with IndyMac for $49,000. (Total = $441,000)
  • For personal reasons, the homeowner was no longer able to make the payment, and is now delinquent. They were offered a HAMP modification, but apparently did not respond. This unsolicited offer is from a BofA internal program.
  • The balance due on the NegAM ARM with BofA is currently $429,000 and the homeowner owes another $17,000 in delinquent payments. (Total due is $446,000 for 1st, not including 2nd)
  • The house would probably sell for about $325,000.
  • The offer from BofA:

  • BofA is offering to reduce the principal (including delinquent payments) to $334,400.
  • The new loan would be a fixed rate at 5.5%, with the same term (about 25 years left), but amortized over 40 years. In 25 years the homeowner would owe a balloon payment of $198,000.
  • The current minimum payment on the NegAM ARM is $1,966 (not including taxes and insurance), and the payments on the new loan would be $1,725 per month (principal and interest).
  • There is no mention of the 2nd in the offer.
  • Category: Bailouts, Credit, Real Estate, Think Tank

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    6 Responses to “Banks Are Getting Desperate With Principal Reduction Offers”

    1. ashpelham2 says:

      Man, the homeowner would be stupid to turn that down. In these deals, perhaps someone could explain to me what happens to the principal that is taken off of the balance? Is this debt forgiven? Is it taxable, and how does it effect one’s credit? Seems like a relatively new thing, so I wonder what the typical FICO score hit would be?

    2. says:

      I wish I could get the same deal from my bank! I’m not is default, so I don’t think i qualify.
      on the other hand, if he’s not able to pay $1966, I doubt he’ll be able to pay $1725. That’s only $240/month.. . If I were in his shoes I’d probably either continued “rent” the place for free until eviction, or bargain for even better deal!

    3. JoWriter says:

      Hard to believe. I was under the impression that banks were refusing to modify loans. This offer must not be on a California property. (haven’t read CR yet.)

    4. @ ashpelham2

      I believe the debt is a writeoff against future profits for the banks. Considering it was probably created out of thin air there is no real skin in the game for the bank. IOW, due to the nature of fractional reserve banking it’s not like the bank actually lost a depositor’s money in this deal.

      I think their main concern is to get that cash flow from the homeowner going again. That way they can plug that money into the magic money multiplier(fractional reserve banking) and get it growing again.

    5. [...] Maybe having to renegotiate with their customers like BoA. [...]

    6. Obe1 says:

      No reason for the borrower to agree to this. They are much better off to just walk away, wait a year, and purchase a similar home, or cheaper, with a 40 FHA loan.

      Yes, FHA will make the loan, they are desperate and are make tons of loans at 3.5% down to people that just went bankrupt on a home 1 year ago. Crazy? yes but the US Treasury is desperate to get money printed and lent out to people.