Have you heard the axiom that if it sounds too good to be true it isn't? That may be the reason why homeowners who are underwater on their mortgages are ignoring a huge money giveaway by Bank of America.
Under an agreement following the take over of Countrywide, Bank of America has begun writing down principals of loans by up to $150,000.00!
“Bank of America is trying to modify troubled loans using principal reduction, but it's seeing surprisingly poor results.As part of the $25 billion mortgage servicing settlement over so-called “robo-signing,” it announced in May that it would begin sending out letters to borrowers, offering an average $150,000 reduction in their loan balances. Of the 60,000 that went out in the first mailing, more than half went unanswered.”
Working in an insurance company delinquency department on delinquent commercial real estate loans many years ago, I found that a large number of delinquent borrowers simply disappeared or put their head in the ground once the notice of default was sent out and foreclosure started. They simply would disappear or wouldn’t respond. There may be some of that happening here. There are likely people afraid to open the letter or just contemplating walking away anyway so ignore it altogether.
The delinquent borrowers likely have some affirmative action to take, for example bringing money to the table to bring the loan current based upon the lower loan balance and lower payment schedule and some people may simply not have the ability or desire at this point to follow through even though it is to their benefit. I suspect however most could do so at least initially, though many may also feel that ultimately they could not or do not want to handle the smaller loan either.
Perhaps the real incentive would be to give those borrowers who are current on their loans a reduction in their principal balance, which would motivate those borrowers who were delinquent to bring their mortgage current in order to benefit from the same reduction in principal. Such an action might also help partially mitigate the inventory of 11 MM underwater homeowners
I think the incentive is wrong as many government programs seem to be. Why not reward those who are performing, i.e., those who either are current or bring the loan current within a specific period at the existing balance and payment? I think that would be a better approach to solving the ongoing delinquency problem. I suspect it would make people think twice about going seriously delinquent in the first place. As an added bonus if B of A and other lenders were to reduce loan balances for current borrowers it would also put a dent in the number of underwater mortgages since for many the loan balance would be reduced to a level below the home’s value. That might stimulate those borrowers to sell their home, pay off their mortgage and seeking a subsequent home and mortgage better suited to their means. And all the time honoring their obligations. Such a unique concept?! And it would provide the housing and housing finance markets with badly needed sales transactions.