BofA Embraces 2nd Mortgage Mods, and Polishes Image

Relief for homeowners groaning under the weight of burdensome second mortgages is about to come from an unlikely source: Bank of America, which has been one of the most reluctant of the big lenders to modify first mortgages.

After the Obama administration accelerated its efforts to persuade big banks to modify terms on second mortgages, Bank of America stepped up with the first signed agreement to do so on Jan. 26. The irony is that, before now, BofA modified fewer mortgages on a permanent basis under the federal government's Home Affordable Modification Program (HAMP) than nearly any other big lender: just 3,183, through last December, with another 9,178 modifications awaiting the final sign-off from borrowers.

But times are a-changing--and fast.

In boom times, many home buyers piggybacked home-equity loans on their primary mortgages to finance up to 100% of their home's purchase price.

Back in April 2009, the Obama administration added new guidelines to its foreclosure prevention program after investors in second mortgages -- such as pension funds, insurance companies and hedge funds -- complained that revising only first mortgages ignored their rights. It also presented a conflict of interest, since many loans are held with banks that also hold second mortgages. The new rules said banks that modify first mortgages must also modify second mortgages simultaneously.

Despite the fact that the government offered financial incentives, the revised plan had few takers among banks and other big mortgage-servicing companies. Simply put, there wasn't enough money in it.

Then the situation became more dire. "For many homeowners facing severe financial difficulty," said Barbara Desoer, president of Bank of America Home Loans, in a statement issued by Bank of America, "decreasing the payment on the first mortgage without a reduction in the payment on the second lien may not produce an affordable combined mortgage payment."

Bank of America's Chief Executive Officer Brian Moynihan made a "verbal commitment" to the program in early January during a meeting with Treasury Secretary Timothy F. Geithner. With billions of home-equity loans and limited resources to cover likely losses, BofA may have become as concerned as the government that millions of struggling homeowners won't be able to stay afloat, despite modifications of their principle mortgages.

While both bond investors and consumer groups are already criticizing the second-mortgage program as underfunded and ineffective, beleaguered homeowners may have reason to celebrate. Either way, Bank of America's new initiative proves that, when it comes to home lending--no matter what the rate of return--there's no interest like self-interest.
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