The mortgage principal problem

Bank of America's plan to forgive certain kinds of mortgage debt, announced earlier today, is a reminder that the nation's foreclosure problems haven't really gone away. They've just been deferred, through various loan modification efforts that seem to be having mixed success. This new program could involve cutting as much as $3 billion in mortgage principal over a five-year period - but only for homeowners with certain adjustable-rate mortgages written by Countrywide, and only for borrowers who are 60 days or more late in paying their loans and owe more than their home's current value. Bank officials describe it kind of a pilot program that could be expanded, though you just know that they're holding their noses about the notion of giving up principal. From the LAT:

Borrowers who agreed to the restructured terms and who made the lower payments as scheduled would be able to gradually convert the principal placed into forbearance into forgiven principal over a five-year period. For example, a borrower owing $250,000 might be required to make payments on only $200,000 if that is what the home is currently worth, said Jack Schakett, credit loss mitigation strategies executive at Bank of America Home Loans. A borrower who stayed current on the modified loan would have 20% of the set-aside $50,000, or $10,000 of their debt, erased each year. An exception would be made in the fourth and fifth years of the modified loan if home values recover, Schakett said. In those years, the balance could be reduced only to the current amount of the home's value -- a feature the bank designed to placate the investors who own many of the former Countrywide mortgages.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
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