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Thursday, March 25, 2010

BofA to Consider the Reduction of Mortgage Balances

Bank of America will become the first bank to consider the reduction of mortgage balances as part of their mortgage rescue plan.

The program, while limited in scope and available by invitation only, signals a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure. It comes as banks are being urged by the White House, members of Congress and community groups to do more to stem the tide.

The Obama administration is also studying whether to provide more help to people who owe more on their mortgages than their homes are worth.

Bank of America’s program may increase the pressure on other big banks to offer more help for delinquent borrowers, while potentially angering homeowners who have kept up their payments and are not getting such aid.

Citigroup is also said to be making such a consideration. So far, the program will be extremely limited.

This was a bone of a debate between myself and Wade Rathke. Rathke was adament that the reduction of balances was critical not only to giving borrowers an affordable mortgage but to show a correct balance sheet for banks.

That's because we've seen the reduction of real estate values and Rathke believes that mortgage balances need to reflect that or banks are showing assets that are simply not realistic.

I see all these programs as foolhearty and so this would only extend a misguided policy.


David Leach said...

I can kinda understand where this is coming from... better to get their customer that are underwater a bit of rope to save some of the value instead of loosing most of the value. Couple of problems though is that:

1) the underlying reason the customers are having a problem keeping up with their mortgages is probably because they now have reduced incomes (i.e. someone lost a job). So reducing their balances doesn't really do much good until their incomes recover.

2) For us poor shlubs who pay the mortgages on time (and in my case refinanced to a 15 year loan about 8 years ago) it just gets more frustrating to see this.

If I had a say in this I would suggest they make these billions available to small business' via loans and such so that the economic base can be improved thus potentially improving the lot of the folks underwater....

mike volpe said...

This is certainly a complicated issue. It was by far the most interesting part of my several interviews with Rathke.

It may make it better for them but on the other hand it makes it worse for those looking to score a foreclosure deal. I don't think it makes policy sense to reward this behavior.

I think you let the market determin winners and losers.

AG said...

Maybe home ownership is just plain overrated. Its no coincidence that the growth in home values came with a housing affordability crisis.

David Leach said...

I agree. Let the market determine the winners and losers. For the same reason I HATED the bailouts of GM and banks because it distorts the market and encourage moral hazards.

And as you point out, it prevents opportunities for someone to acquire a foreclosure deal... my first house I bought back in the 80's was a FHA foreclosure.

The primary intention of our system is the freedom to succeed... and the freedom to fail (which presents an opportunity for someone else to succeed).