Banks Are Getting Desperate With Principal Reduction Offers

Calculated Risk has a fascinating and detailed look at an UNSOLICITED Principal Reduction Loan Modification (pdf) offer from BofA.

A few background details:

  • The homeowner bought the house in May 2005 for $420,000.
  • The homeowner refinanced in March 2006. This included a negatively amortizing adjustable rate mortgage (NegAM ARM) first with BofA for $392,000, and a 2nd with IndyMac for $49,000. (Total = $441,000)
  • For personal reasons, the homeowner was no longer able to make the payment, and is now delinquent. They were offered a HAMP modification, but apparently did not respond. This unsolicited offer is from a BofA internal program.
  • The balance due on the NegAM ARM with BofA is currently $429,000 and the homeowner owes another $17,000 in delinquent payments. (Total due is $446,000 for 1st, not including 2nd)
  • The house would probably sell for about $325,000.
  • The offer from BofA:

  • BofA is offering to reduce the principal (including delinquent payments) to $334,400.
  • The new loan would be a fixed rate at 5.5%, with the same term (about 25 years left), but amortized over 40 years. In 25 years the homeowner would owe a balloon payment of $198,000.
  • The current minimum payment on the NegAM ARM is $1,966 (not including taxes and insurance), and the payments on the new loan would be $1,725 per month (principal and interest).
  • There is no mention of the 2nd in the offer.
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