Lender will slash mortgage amounts

$3b deal will alter Countrywide loans

March 25, 2010

Thousands of struggling homeowners who had mortgages with Countrywide Financial Corp. — including hundreds in Massachusetts — will be able to reduce their debt under a $3 billion settlement agreement the company struck with Attorney General Martha Coakley.
As part of the settlement filed yesterday in Suffolk Superior Court, Bank of America, which now owns Countrywide, agreed to lower the principal amount these borrowers owe by as much as 30 percent. And eligible Countrywide borrowers who have lost their homes because they could not pay the mortgages, can get some compensation from a $2.4 million fund, state officials said.
The agreement will provide an estimated $18 million in mortgage help for Massachusetts homeowners and about $3 billion to some 45,000 distressed homeowners across the country. The state will receive $1.7 million to cover the costs of the investigation and monitoring the settlement, state officials said.
The settlement expands a 2008 agreement that Bank of America made with multiple state attorneys general to provide loan modifications for some 400,000 delinquent borrowers offering up to $8.4 billion in savings. Coakley at the time declined to sign the settlement and continued to investigate.
“With today’s action, we have secured billions of dollars in relief to help keep thousands of families in Massachusetts and across the country in their homes,’’ said Coakley. “Our office has been committed to holding accountable those who are responsible for the foreclosure crisis that has ravaged Massachusetts and has led to one of our country’s worst economic recessions in decades.’’
The announcement addresses a longtime demand from housing advocates who argue that reducing mort gage principal is the best way to limit foreclosures among distressed homeowners who are “underwater’’ — where the value of their homes is less than what they owe on them. About 21 percent of all single-family homes in the country, and about 12.3 percent in the Boston area, are underwater, according to real estate data collector Zillow.com.
“Principal reduction is absolutely key to helping underwater homeowners,’’ said Julia Gordon, senior policy counsel for the Center for Responsible Lending. “Any announcement of a significant principal reduction program is going to help the market move in this direction.’’
In a complaint filed as part of the settlement yesterday, the state alleged that Countrywide, the largest subprime lender in Massachusetts during 2006 and 2007, “engaged in unfair lending practices’’ by approving certain mortgages without assurance that borrowers could pay them. Problem mortgages included subprime loans with interest rates that ballooned after several years, interest-only loans, and payment-option loans that can increase over time.
Bank of America officials said the new plan requires the lender to offer qualified borrowers reductions in their mortgages — before offering to reduce their interest rates — in an effort to help them afford their monthly payments.
Currently, Bank of America considers reducing the principal as a last option to help struggling homeowners. Many housing advocates complain such reductions seldom occur.
Qualified borrowers whose mortgage debt is 20 percent or more above the value of their homes are eligible for a mortgage reduction over a five-year period. Bank of America spokesman Dan Frahm said that helping these homeowners benefits the lender as well because nearly half of such distressed loans end up going into delinquency.
“They are a set of our customers that need innovative solutions,’’ he said.
The announcement was greeted with some skepticism among housing advocates who have complained that Bank of America has been slow to help homeowners. Bank of America has completed 27,000 loan modifications under the federal Home Affordable Modification Program launched last year.
“Bank of America has been one of the worst loan servicers in offering homeowners help in this crisis,’’ said Boston lawyer Gary Klein, who specializes in foreclosure defense.
Kris McDonald, a community leader with the nonprofit Brockton Interfaith Community, which is active in fighting foreclosures, said she hoped the lender follows through on its commitment.
“Less foreclosures means less hardship to homeowners and less deteriorated structures in our neighborhoods,’’ said McDonald. “We’re encouraged by this announcement, but we’re reserving judgment until we see concrete action from Bank of America.’’