Call it anything but altruistic, but Bank of America has announced a new focus on principal forgiveness – versus interest rate reductions – for its portfolio of highest risk loans.
From the bank this morning:
“The centerpiece…is a program of earned principal forgiveness that addresses severely underwater mortgages with some of the highest rates of delinquency – specifically subprime loans, Pay-Option ARMs and prime two-year hybrid ARMs that are 60 days or more delinquent with a principal balance of 120 percent or more,” said Barbara Desoer, president of Bank of America Home Loans.”
“With implementation…Bank of America will make principal reduction the initial consideration toward reaching the HAMP’s target for an affordable payment equal to 31 percent of household income when modifying qualifying subprime, Pay-Option ARM and prime two-year hybrid ARM loans that are also eligible for NHRP. An interest rate reduction and other steps would then be considered, if additional savings are necessary to reach the targeted payment.”
The approach: “An interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years resulting in a maximum 30 percent decrease in the loan principal balance to as low as [but not below] 100 percent LTV.”
There’s nothing quite like continuing to make payments on a property knowing that in five years you won’t have accrued any equity. But hey, principal forgiveness sure sounds good.
∙ Bank of America Introduces Earned Principal Forgiveness [bankofamerica.com]
So during the bubble people would make up stuff to increase their income to get a bigger loan (happened all the time). Now, sounds like people will want to hide income to reduce the payments for that 31% number.
All these regulations seems pointless.
^^
the point is to keep underwater homeowners from giving up and walking away.
Think of it as financial theater. They’re performing the real estate interpretation of “Weekend at Bernie’s.” Comedy at it’s finest.
Deadbeat liars get a break. Again.
“There’s nothing quite like continuing to make payments on a property knowing that in five years you won’t have accrued any equity.” actually, there is something almost identical, except you don’t get the tax benefit, it’s called paying rent.
I’m sure they’ve run some numbers and figured they’d make more money doing it this way in the short term knowing that many of the owners will end up defaulting anyways.
Stop bailing water out of a sinking ship, and let the homes foreclose. An atrocious waste of money, and it certainly rewards those who were not responsible, and punishes those that were responsible and conservative.
Another thought….Imagine that you, recognizing that you could only safely afford a modest place for $X. Your friend/coworker/neighbor buys a huge McMansion for $2X. He enjoys it, you work hard to make your payments. Two things happen:
1. You are taxed to bailout everything from the Investment Banks to Car Companies.
2. Your friend/coworker/neighbor can’t afford the house, is given assistance, and is now offered principal forgiveness. You are offered nothing, and on top of that are expected to shoulder the costs of his/her stupidity.
Not to mention all of the fraud, such as income fraud, mentioned above. What a great place!
“actually, there is something almost identical, except you don’t get the tax benefit, it’s called paying rent.”
Riiiiight. So I either rent the shelter from the bank (i.e. financing depreciation, or “owning”), or I rent the shelter from the guy who rents it from the bank. Except the latter option is about 40% cheaper on a net basis and requires zero maintenance on my part.
Now cue the perfunctory comment about painting walls…
I dont think its 40% cheaper to rent Dude, the math does not support it. If you can, show me the calcs with a normal 2/2 condo.
The 31% number is a joke anyway. A traditional prime loan requires PITI (principal, interest, taxes, insurance) max out at 28% of gross income, and that PITI + all debt max out at 36% of gross income. HAMP says 31% for PITI and no limit for PITI + other debt. All HAMP requires is that people with PITI + other debt above 55% of gross income undergo HUD-sponsored debt counseling.
As of December, more than 50% of HAMP *permanent* modifications had PITI + other debt above 50% of gross income. And 32% had PITI + debt above 70% of gross income (wow!).
As you might guess, a high PITI + other debt relative to gross income only increases the likelihood of re-default. And Treasury itself assumes that 40% will re-default.
All of this is really just kicking the can down the road, and given the debt-to-income ratios, I suspect more than the 40% predicted under Treasury’s model might re-default within 9-12 months after modification. (not to mention that BofA’s plan here, while given the fancy name, probably won’t do much given that we’re talking about seriously underwater people for the most part)
Editor, please note that for negative amortizing loans (e.g. Pay-Option where the buyer chose lower than amortized payments), BofA looks to be offering reduction of principal down to 95% LTV in some cases in conjunction with HAMP.
But if you really want to see how not to build equity, the HAMP regs also allow modifying to 40-year amortization schedules, or if the servicing agreement doesn’t allow 40-year payments, the loan is made 30-years but based on a 40-year amortization schedule with a balloon due at the end. I don’t know if any of you have ever looked at 40-year amortization, but after 10 years of payments, you’ve only paid down 10.2% of principal, and after 20 years, only 26.9%. If there were a balloon after 30 years, the final balloon payment would be more than 45% of the principal amount!
@Legacy Dude, listen, if it’s 40% cheaper to rent in the city, than i take my comment back. I don’t think however that on the average, in SF that it’s 40% cheaper. For that matter, I don’t think it’s 40% cheaper to rent a decent condo in a decent part of the east bay. even so, you’re exactly right… rent the shelter from the bank or rent the shelter from the guy who rents it from the bank. if you pick the former, you at least get some tax benefits and who knows… if you do it long enough, maybe the market finally turns around, in say, 5, 7, 10 years?
Just another zombie bank kicking the can down the road, trying to keep up the appearance of solvency for another year. A loan where they have to write off 30% of neg-am “principal” is still better than jinglemail.
At least this principal reduction program has a chance of actual relevance to some home “owners”. The government loan term modification programs were (are) all kind of farcical, in that those few who could legitimately qualify for them had already been covered by existing lenders’ loan service programs hardship policies.
BTW, is anyone else amused that BofA is allocating 3 billion dollars for this, while the State of California’s new home-buyer tax credit program only has $200 million?
Mr. Jones wrote:
Yep.
Welcome to capitalism, American-style. You think bailing out AIG so that the traders at AIG Financial Products, who ran the entire company into the ground selling credit default swaps could get their “guaranteed bonuses”, wasn’t about rewarding those who were not responsible?
There’s nothing special about the housing market going on here, unfortunately.
Does anyone have the link to the SS post that basically stated that own vs rent had gone down from roughly 270% to 230% in SF thanks to market correction? That would be a good data point in the rent vs own debate.
[Editor’s Note: That would be the Forbes “study” which was actually for the San Francisco MSA (including Oakland and Fremont), a point most people seem to have either missed or swept under the rug (and might help explain a bit of that “San Francisco” correction).]
Mr. Jones and garrett – some rough math:
Sunset 2/2 bungalow. Rent for $2,500/month or buy for $700K. With 20% down at 5%, your P&I is $3K/month, or $2,250/month after taxes assuming 25% reduction to P&I from tax savings. Property taxes add $730/month (1.25%) for a total payment of about $3K/month, or a 20% premium to renting. This assumes no maintenance expense, which is impossible given the general quality of Sunset housing stock. If you spend just $6,000 a year on renovations or maintenace, which is reasonable, your premium is 40%.
Or you could always get a brand new condo in Soma that doesn’t require maintenance. Assuming a 2/2 that rents for $3,000 per month and sells for $750K, your premium to renting is 30% with similar math and $650/month in HOA.
In other words, renting is a great way to build equity. You sock away an extra ~$800/month and don’t need to put a $150K down payment in first loss position. Of course, you could put less down to buy, but then you’re spending even more money to own than rent. Just ask my landlord.
If it was only 40% cheaper to rent there would be a line of buyers.
for some of us, it is 75% cheaper to rent comparable condo.
Thanks LegacyDude, thanks for the math, I see where you are coming from.
I guess, if you ran the numbers using a lower sales price and lower HOA for a condo that was not brand new you get closer to parity. What would your calculations come out to be if the place was $650k and HOAs were $550 month @ 4.5%?
As for those who are in a rent controlled place, then it can be more than 40% cheaper. But that’s a whole different story, since you have to live in a place built before ‘modern times’
Here in Menlo Park I rent a place that would catch $600K if it were a condo (2/1 “townhouse” downtown) for $1550 a month.
Mr. Jones: in that case, your fully-loaded, tax-adjusted monthly ownership payment would probably be close to $3,200/month with 20% down, or around $3,600/month with a whopping 3.5% down courtesy of Subprime II aka FHA.
For Jeremy, the tax-adjusted P&I alone is more than the rent assuming 20% down. Not even worth adding property tax and HOA to the equation. Put another way, a place that rents for $1550/month should sell for no more than $300K to be break-even to renting assuming 20% down, 4.5% mortgage, $350/month in HOA, and 1.25% annual property tax. It’d need to sell for much less to be attractive as an investment. FAB, you out there?
Thanks LegacyDude, so using those assumptions its $200/month more to rent or about 7% more expensive (plus any potential loss/gain you may or may not realize when you sell). I guess it goes to finding the right property where the numbers make sense.
“In other words, renting is a great way to build equity. You sock away an extra ~$800/month”
I don’t know I found when I was renting my extra $800/month just got spent on hookers and blow. For some reason now that I am paying the huge premium for owning a place I’ve have been able to double my annual cash & retirment savings.
Isn’t the first rule of capitalism, first do no harm?
Keep more families in their homes not turning in their keys. Let them keep paying back the already bailed out investors and wall street savants who thunk up that crazy swappity doodle credit tulip default thing-a-magig.
“Look these absurd risks have turned into diamonds!”
Spread that love around. Not just for k street, and wall street but also for main street.
Now, if we can only make politicians and civil servants pay for their own healthcare.
When I bought my place I was paying $2.576 a square foot for a 2/1 apartment with no parking in SOMA. Now I am paying a net of $2.824 a square foot for a 2/1 with parking in the Western Addition. If you figure about $150 to rent a parking space, it reduces the cost to about $2.639. So once equalizing for the pure economic factors, I’m paying about a 2% premium to own.
Maintenance on the condo is minimal and mainly is a result of me wanting to upgrade the appliances, which I wasn’t able to do when renting, the landlord would install whatever cheapo model was on sale at home depot whenever something broke. So there is an increased cost there but also a increased benefit.
Obviously there are deals to be had out there – a few have been featured here on SocketSite recently. I never said 100% of SF homeowners were paying 40% more to own than rent. Congrats to those of you who are break-even or better.
But speaking GENERALLY, home prices in most parts of this city remain substantially overpriced vis-a-vis equivalent rents by premiums of 20-40%, artificially supported by the factors that have been discussed here ad infinitum. Of course, an easy way to overcome that is to put down 30% or more, but that’s another discussion.
“If there were a balloon after 30 years, the final balloon payment would be more than 45% of the principal amount!”
Though even the most die hard bears would probably believe that appreciation would have returned enough over those 30 years to take the sting out of that 45% balloon.
How exactly does one earn equity on a property that is underwater?
BofA reports that no more than 45,000 in the US will qualify. That’s an average of under 1000 per state. Use a 50% BS factor on the part of BofA and the fact that at least 50% will drop out and get foreclosed, you’re talking a little over 200 people per state who will even make it through. Probably around 100 in the entire Bay Area. Maybe as many as 10 in SF.
Doubt this will have much of an impact, except for political posturing.
You’re more than welcome to actually look into what’s going on in this cottage industry at any time, Tipster. Because-I-say-so multipliers, from you, probably aren’t going to make anybody do jumping jacks.
Thanks Editor for the FORBES study.
Indeed buying in the Bay Area is an expensive proposition compared to renting. Premium to buy = 232,7%. No doubt there a lot of rationalization going on in the brains or buyers to justify paying TWO HUNDRED AND THIRTY TWO PERCENT of a rent for the pleasure of being a homeowner…
SF being more desirable and expensive than the rest of the BA in both rents and prices, I am pretty sure this statistic applies to SF somehow…
Be mindful of the hidden taxes for forbearance and mortgage interest reduction.
I just learn a case example of someone who had $150,000 principal forgiven by the bank in 2009. The bank sent the homeowner a 1099 Federal Form misc earned income for year 2009 this amount which was a total shock to the homeowner. So Homeowner now owes tax on $150,000 and is scrambling to find funds to pay it off. Imagine an unexpected tax bill of $45K -$60K hit for 20%-35% tax bracket. Ouch.
I also happen to listen to a caller who dialed into a financial talk radio program, Homeowner had mortgage interest reduced resulting in a savings of $35,000 and an earned income tax notice for this amount which resulted in ~$8000 in tax payment. He was upset the banks didn’t inform him.
Aside from the shock, either case, it was a net benefit.
In essence, the bank gets a tax break and a portion of this “rescue money” is funded back by homeowners via income tax.
“Because-I-say-so multipliers, from you, probably aren’t going to make anybody do jumping jacks.”
annon, the King of Miraloma Real Estate. Hillarious.
Ha. You can’t pick a name, focus enough to be droll, or even be bothered to spell hilarious correctly. In his post Tipster is talking pure nonsense. BofA owns all the Countrywide Pay Option ARMs, yet he thought he’d divide 45,000 by the whole country. That’s all right with you tho as long as you can flash your lack of wit in an attempt to say something snide to me.
Yes, and HAMP was going to save 4mil and ended up starting with less than 10% of that. I gave them the benefit of the doubt with only a 50% fudge factor.
At a 10% rate, assuming ALL of these mods are in CA (ignoring the fact that the plan was driven by the MA attorney general), that’s 1500 for the bay area, 150 in SF. BFD.
So you say. But you are jumping the gun. Looking back at HAMP and its first rollout, the powers that be decided it wasn’t effective enough. So they went back to the lab and tweaked it a few times. That’s the story for all of this stuff so far. They’ll probably look at 45K, realize it’s nothing and make them expand it. If I were to guess. Also I’d guess that there have probably been more than 150 done in SF this year already, whether or not they fit into that particular criteria I don’t know, but Countrywide was a big player and pay option ARMs are considered “hardships” by HAMP.
No, tipster is exactly right. B of A currently has 1.1 million mortgages that are at least 60 days past due. And that number is growing. It says it will voluntarily forgive some principal on an invitation-only basis to delinquent borrowers whose mortgage balance is at least 20 percent greater than the value of the house. These people would then have to demonstrate a hardship like a loss of income. B of A estimates that about 4% of its delinquent borrowers could be helped nationwide. 10 for SF is probably too high an estimate.
The foreclosure pipeline continues to swell in SF and elsewhere. This sort of kicking-the-can stuff merely confirms that this problem ain’t going away soon, and thus any housing recovery is a long, long way off.
For one aspect in its initial rollout, a principal reduction program, for now. They’ve been doing interest rate reductions through HAMP. And Pay Option is a hardship as far as HAMP is concerned. You guys estimating numbers is beyond the pale. But you like saying big things, arguing, and then slinking away. Don’t you?
Though it sounds good, I’m skeptical about this “forgiveness” thing. How do I know that this is not just “lip service,” or a pre-Lenten act to bide time to proceed for foreclosure process. For certain so, it would not make much impact just like Obama’s HAMP. BoA could not erase the fact that they’re out to make money.
The big problem with the “forgiveness” thing is that you are not supposed to reward stupidity, gaming of the system, or failure. You are supposed to reward people who have been responsible in their home buying.
This says so much about the society we live in.
Talk is Cheap.
ESPECIALLY when it comes from BofA.
“The big problem with the “forgiveness” thing is that you are not supposed to reward stupidity, gaming of the system, or failure.”
BofA was stupid to loosen lending standards. They failed to properly evaluate risk.
This is all just to delay the need for foreclosure, while sucking every last drop of blood from upside down borrowers. They just want time to clear out their existing REO inventory before adding to it.
Mr. Jones – Satchel used to make a point that the system was set up to be gamed and good people are fools for sticking to their ethics and not gaming the system : preening for mods, walking away from underwater properties, etc.
While I don’t agree with Satchel about abandoning ethics in favor of monetary return, I can see his point.
Our government makes laws under pressure from lobbyists and their constituents, neither of whom fully understand or care about the game theory implications of those law changes. They just want change NOW. Some of those effects take years to take evolve and there’s no accountability when things go wrong.
I don’t know how to fix the situation, but a start would be to require an analysis of how the law change would play out in a field of cold hearted ethically corrupt but law abiding people. Had we done such an analysis and taken the results seriously, many of the past two decades of financial deregulation would have never been passed into law.
BofA was stupid to loosen lending standards. They failed to properly evaluate risk.
These loans weren’t written by BofA.
MOD, I agree. I probably said it wrong. I didn’t necessarily mean gaming the system within the structure of the rules. I guess I was referring to people who deceived, either lying by their income or claiming to not have known the risks.
We just elected a president who campaigned on “Change”, and he and the rest of the corrupt politicians are effectively stealing from future generations, and will never be held accountable since they will be out of office (working for lobby groups) by the time their “Change” time-bomb explodes. Healthcare being the most recent example.
Much like you, I am not sure what the solution would be. I guess a vote against anything that gives more power to those whom we know are corrupt by nature (i.e. politicians), a vote against anything that increases the size of government, creation of a true 3rd party, and to allow the failure or financial punishment of those who make bad decisions (i.e. banks and the people borrowing money who couldn’t afford what they bought).
A distinction without a difference.
How do you figure? BofA is squarely going after government money. That’s nothing to do with what you said.
Oh brother. If it was in their best interest to foreclose, or allow a short sale, that’s exactly what they would do. No matter what subsidies they get from the government, it will pale in comparison to the blood they are hoping to keep sucking from upside down borrowers.
Look at who they are targeting, people who have NO financial incentive to keep making house payments. The bank knows these people are ready to(and should) walk.
Sure, I don’t disagree with that by and large. (But I was told by a forensic auditor that banks can get up to 150K for some loan mods, and that’s not peanuts.) You said one thing, BofA should have done its homework in the first place. I disagreed, because that’s not what’s going on here. Then you said there was no difference. Now you’re talking about other aspects of the big picture. We’re not in the same room, man. I only read what you write.
How about this annon? BofA was stupid to buy Countrywide. It failed to understand how bad Countrywide’s loan portfolio was.
Do you really think so? I feel like it was all very hand in glove, and that they knew precisely what they were getting into. They knew in advance that government would do whatever possible to prevent ARMs from going the route that subprime went. It hasn’t been a lack of will that’s kept the 1.1M who are vying for loan mods to get them. It’s been lack of proper infrastructure. If this were another country, there would be a fiat. “All ARM holders now have 3.25% locked for five years” or something. But we don’t do things that way in this country. No, we cozy up to private business and then let them sort it out. When they do it wrong we give them a carrot. They do it wrong again, another carrot. So we’ll see.
“If this were another country, there would be a fiat. “All ARM holders now have 3.25% locked for five years” or something. But we don’t do things that way in this country. No, we cozy up to private business and then let them sort it out.”
Damn that Constitution and its silly ol’ Takings and Contracts clauses. Those nuisances never protected any little guy . . .
BofA was already losing $Bs on mortgage banking before acquiring Countrywide, indicating that their standards were too loose and their risk assessment was poor, which added to the inflation of the bubble.
That’s why it doesn’t really matter that the first loans they choose to cut principle on were written by someone else.
Was that something?
No, BofA’s problems stemmed from CDOs. Not subprime lending.
http://www.msnbc.msn.com/id/21771601/
Loose standards, in general? OK. But that’s now a third thing you’re saying.
Take a look at how BofA’s mortgage holdings were doing BEFORE acquiring Countrywide.
Do you know what CDOs are? That’s what I just did.
I guess I was referring to people who deceived, either lying by their income or claiming to not have known the risks.
The number of people who qualify for the above statement is small. The effect of not doing bailouts on the so-called stupid or corrupt home owner is that ALL homeowner’s values get hurt.
http://en.wikipedia.org/wiki/Bank_of_America_Home_Loans
2007 Mortgage Banking: $(1,517,083) thousands
Apparently you didn’t read the article you linked to:
“The latest writedown at Bank of America involves the value of its collateralized debt obligations, which are complex instruments that combine slices of different kind of risk and are often backed in part by subprime mortgages – loans given to customers with poor credit history – as well as other loans”
“as well as other loans”
Subprime was not the only problem.
Also, if no one was willing to buy subprime backed securities, the loans never would have been made in the first place.
Finally, bad loans were made to people with good credit scores.
HAMP was never going to save four million and everyone knew that.
Change means going from the radical right to the moderate center. Boasting about not being able to tell the difference is just sad.
People are asserting that forcing the correction to go faster would be better for everyone, but evidence seems to show that is false. Squeezing the conjured money out of the system as fast as possible would maximize the harm to individuals and destabilize institutions. Buying time makes a huge difference to people on the edge, whether you think they deserve help or not. As long as wages lag well below productivity increases and tax policy remains balanced toward the rich this will all be a nasty slog anyway.
I did read the article I linked to. I do know what CDOs are. I was aware that BofA was not a direct subprime lender. I do not need wikipedia for much, and I find it somewhat comical when wikipedia definitions get thrown up in BBSs by people who really are looking to change the subject. You started off saying that BofA didn’t vett its borrowers properly. Now you’re on this, talking about the CDOs that plagued the whole sector. The fact of the matter is that for direct lending, BofA was actually conservative during the last era. But think what you want. You’ve already made up your mind. “BofA made bad loans before, and the Countrywide purchase is just more of the same.” Fine.
#1 this is not a BBS
#2 If you know what CDOs are why would you say, “BofA’s problems stemmed from CDOs. Not subprime lending”? That is nonsensical since CDOs are made up of subprime and other bad loans…
Ok. I vwill give you the benefit of the doubt.If I misread you as saying BofA had problems stemming from direct lending, can you see why I did?
The effect of not doing bailouts on the so-called stupid or corrupt home owner is that ALL homeowner’s values get hurt.
You’re slapping a value judgment on that (“hurt”). Price correction and is a good thing for people who were not stupid (that would include both people who sat on the sidelines entirely and people who bought far enough back that they’re still way up despite this “hurt” and didn’t screw themselves by “trading up” during the bubble). In any case, the “hurt” you’re talking about just amounts to the deflation of windfall profits that were caused in part by the “stupid/corrupt” buyers driving the market up to implausible levels in the first place.
“In any case, the “hurt” you’re talking about just amounts to the deflation of windfall profits that were caused in part by the “stupid/corrupt” buyers driving the market up to implausible levels in the first place.”
Agree with Shza here. Most people who are prudent would be fine or better off with lower housing prices. Those who were prudent in buying a house will still make profits, albeit slightly more modest ones. Those looking to buy a house will find better prices. And those who were irresponsible get hosed. It’s fair all around.
“this is not a BBS”
And yeah, I’ve generally left that alone, but I used BBSs back in the day with a 2400 bps modem, and this ain’t it. But that’s just me.
OK, not a BBS. Got it. A blog with a message board, then? What’s it properly termed?
“Doubt this will have much of an impact, except for political posturing.”
I’d probably tend to agree with this assessment of BofA’s program for SF.
I do find it strange that people who discussed Option ARMs affecting SF and/or suggested that housing prices in SF could drop 17% in some areas (in order to be at 120% LTV, you could have had a 100% loan and then had your home value drop by 1/6) seem to have been shouted down a lot in the past here, and yet somehow BofA’s 45K homeowners who are determined to have preliminary qualifications for this program (but may not be retained in the program in the end) are somehow going to have a noticeable effect in SF. Or at least that seems to be the suggestion. Odd.
Meh. You said “noticeable effect.” They said “10 or so.” I said “more than that, because Countrywide was a big player locally.” This is probably a dog and pony show for now. With the benifit of hindsight, we can see that the first iterations of all of these things have been, so far. Like I said in the other thread, they implemented new HAMP rules just yesterday. But people trying to act like they can get their heads around exact numbers that SF will see? Straight from a press release? I find it funny that nobody else objected to that notion.