Loan-modification plan gets mixed reviews
Bank of America’s new program to enable some homeowners to modify existing Countrywide mortgages may help people stay in their homes — but also could shove borrowers into a new cycle of loan failures, analysts said Monday.
The bank agreed to settle claims brought by state attorneys general in connection with risky loans Countrywide had originated. The loan-restructuring program would apply to borrowers who obtained subprime loans with adjustable or fixed rates, or who got adjustable-rate mortgages with multiple payment options.
“We will reach out to customers who may be eligible for this program,” said Dan Frahm, a Bank of America spokesman. He said that borrowers need to be seriously delinquent or at serious risk of becoming seriously delinquent. “This could even apply to individuals who are in foreclosure proceedings right now,” he said.
Bank of America bought Countrywide on July 1.
Up to 390,000 borrowers are expected to be eligible for a loan modification under the terms of the settlement. The loan restructuring could apply to about 120,000 borrowers in California, Frahm said. Bank of America will begin sending offers to borrowers Dec. 1.
The settlement is preferable to a prior program of loan workouts that Countrywide had initiated on a voluntary basis, according to California Attorney General Jerry Brown.
“This is mandatory,” Brown said. “We are going to enforce it and make sure it’s reasonable.”
But the new efforts could create a fresh round of problem loans and foreclosures a few years from now, warned Sean O’Toole, founder and chief executive with Discovery Bay-based ForeclosureRadar.com. Many of the restructured loans could produce more woes later.
“Maybe the loan won’t blow up now, but it will blow up in five years,” O’Toole said.
That ominous assessment is based on Countrywide’s approach in the voluntary program. In more than a few instances, O’Toole said, Countrywide’s restructured loans featured payments based on super-low interest rates of 2 percent, with payments rising over time. Put another way, the loans bear similarities to the ones at the heart of the current problems.
“A lot of what we have seen from Countrywide so far is more of the same, maybe worse,” O’Toole said.
Bank of America should restructure the loans so that the payments are high enough to pay down the principal on the mortgages, O’Toole said.
If the housing market doesn’t rebound strong, mortgage balances could still burden houses with more debt than the residences are worth, O’Toole said. He cited the restructuring of a mortgage with a $930,000 balance for a house valued at $500,000. Bank of America rewrote the loan with a fixed interest rate of 2 percent that would last five years.
“Bank of America and Countrywide are kidding themselves if they think that house will be back to $930,000 in five years,” O’Toole said.
But the program appears to at least be a starting point.
“It sounds awesome,” said Carol Hardy, interim director of Vallejo Neighborhood Housing Services. “This is a glimmer of hope. I think it will be exceedingly helpful.”
The key is the prevention of foreclosures, said Guy Schwartz, a branch manager with San Ramon-based CMG Mortgage Inc.
“Anything they can do to help people stay in their homes will help the market,” Schwartz said. “Maybe they’re just buying some time. But if they keep people in their homes, that would slow the foreclosure mess.”
And low interest rates are important in keeping the monthly payments affordable. Under some scenarios, a restructured Countrywide loan could be transformed to a mortgage with an interest rate as low as 2.5 percent during the initial years of the new loan, Bank of America spokesman Frahm said.
Under the program, mortgage and related payments should not exceed 34 percent of a borrower’s monthly income. And borrowers who have payment option ARMs could see an adjustment to their loan balance to create equity in the house.
Bank of America will not proceed with a foreclosure until they have determined if a borrower is eligible, Frahm said.
“Why not do this?” said Scott Simonich, president of San Ramon-based BWC Mortgage Services. “If BofA is going to attempt to make the deals more appropriate for people to handle the payments, it’s a positive development.”
More lenders could attempt to restructure loans in an aggressive fashion, said Jason Brown, a senior vice president with Danville-based StoneCastle Land & Home Financial.
“Bank of America is trying to find the bottom of the market,” Brown said. “Other banks will be under pressure to follow suit or be left in the dust.”