Among the government bailouts none has fallen as flat as modifying mortgages so that borrowers don't lose their homes. Reducing monthly payments by lowering interest rates hasn't stemmed defaults because the most troubled mortgages are often those in which the house is worth far less than the loan. Wednesday,
As pilot programs go, BofA's comes late in the game but could still have a meaningful effect on how the end of the financial crisis plays itself out, says Goldberg. A quarter of American mortgages are underwater, with negative equity in the home. American banks hold $1.5 trillion of those loans and have been generally reluctant to recognize the losses accumulated by the real estate bust. That has led to a situation where no one acts, though it is in everyone's best interests to do so. If BofA is willing to write off principal up front and thinks it can recoup some of those losses by keeping customers in their homes, other banks may follow suit.
There is also evidence the strategy works.
BofA's latest effort to keep owners in their homes did not come about without a nudge. The forgiveness program is part of a settlement with Massachusetts officials over predatory lending charges related to the bank's purchase of subprime lender Countrywide Financial. Add to that the fact that Charlotte-based BofA urgently needs to repair its loan portfolio which, Goldberg estimates, has a quarter of mortgages and a third of home equity loans underwater. The bank is also under pressure from federal officials who are disappointed with current mortgage modification programs that have seen borrowers default repeatedly despite reduced monthly payments.