In Bank Of America Program, Finally A Mortgage Crisis Solution

Government mortgage modification programs have so far targeted people’s monthly home loan payments. These plans have proven to be failures. There are a number of theories about their lack of effectiveness. One is that people who can make lower monthly payments still have no hope of owning their homes because they owe more than their homes are worth.

Underwater mortgages are one of the primary cause of the housing crisis and by many estimates there are 11 million of them in the US.

American homeowners who look to the day that they sell their house often expect that they will not get enough money to pay the bank, let alone have funds for retirement of other needs. These people are tempted to default on their mortgages even with monthly payment adjustments in their favor. Years of making home payments simply to put a roof over your head is not much of an incentive when it is put against turning keys into the bank and moving to a rental.

Bank of America has begun a program to cut the principal due on homes. Reuters reports that the bank will allow people with mortgages that are 120% or greater when compared to the market value of their houses to get a modification that would bring that number down to 100%. At least then, if the real estate markets does recover, homeowners who are underwater have some hope of positive home equity. The news service says that “the plan, to begin in May, is among the first by a U.S. mortgage lender that takes a systematic approach to reducing mortgage principal to tackle the thorny issue of preventing foreclosures when home values drop well below the amount owed.”

It is unfortunate that the Administration did not see the long-term benefits of reducing home mortgage principals before it embarked on its $75 billion Home Affordable Modification Program which has done  little to curtail defaults and foreclosures. The plan was recently criticized by the Special Inspector General for the Troubled Asset Relief Program as being a waste and “meaningless.”

It was a question of human nature. An underwater mortgage is an ongoing blow to hope, the hope that a person who owns a home might get some benefit from making monthly payments year after year, even when those payments are a strain on the home dweller’s finances. The Bank of America plan may be expensive if many mortgages are altered, but it will not cost nearly the $75 billion he government program cost.

The federal government still can make its home owner salvation plan work. It simply needs to use Bank of America’s new system as a template.

Douglas A. McIntyre