BofA recently announced that starting on December 1st it will contact some 400,000 Countrywide customers and, where possible, renegotiate the terms of their mortgages so as to help the borrowers avoid foreclosure. This move is a result of a settlement the bank reached with the Attorney General in California where some 125,000 of those borrowers live.
The settlement with California and ten other states comes as a result of a suit brought in June by the California Attorney General Jerry Brown. In a harshly worded statement, he said,
"With this settlement, homeowners will receive direct relief from the catastrophic damage caused by Countrywide. Countrywide’s lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn’t understand and ultimately couldn’t afford."
The settlement applies to borrowers who took out subprime mortgages and the pay-option loans, the ones with potential for negative amortization. These loans are among the hardest for consumers to understand and thus were the ones that were most widely the subject of lending practices that were labeled predatory.
Starting out, BofA will suspend foreclosure proceedings as they work with those people to potentially modify the terms of the loans for borrowers who qualify for renegotiated loans. The new terms would likely conform to the borrowers’ ability to make continuing payments.
Other borrowers will potentially see their loans modified into fixed rate loans or to loans that have potential for modest, affordable increases in the case of those who have their interest rates lowered to as low as 3.5%. Holders of pay-option ARM loans where the loan balance has most likely increased from the initial amount may be eligible for a reduction in the loan balance to 95% of the home’s current value.
The program currently applies to borrowers who are in default or headed there. This program theoretically applies to 25% of the 1.6 million homeowners who are headed for foreclosure according to estimates from The Center for Responsible Lending.
One would hope that that if this program actually helps a significant numbers of the targeted borrowers that they could start attacking those who are struggling just as badly with a toxic loan but who have been able to avoid missing any payments. Arguably, those who have managed to stay current are more deserving of a decent loan than those who are in foreclosure.