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Alan Grayson on the original problem with Bank of America

As part of the mortgage settlement announced earlier this year, Bank of America announced that they sent out 200,000 letters to underwater mortgage holders they own or service, offering them the opportunity to reduce their principal. Eligible letter recipients can receive reductions as high as $150,000. Sounds good, right? Not so fast.

David Dayen points out that this isn't really going to hurt Bank of America much at all:

In other words, this is exactly as we suspected; BofA will try to extinguish cash penalties by modifying principal on loans they service but don’t own. And they’re trying to load up on the modifications with those loans. ... I’m generally happy to see any principal reduction happening, though of course these are letters and not actual principal reductions. BofA sent out the letters to 200,000 borrowers, and now they can pick and choose on whom to bestow these benefits. And additionally, BofA will build in a three-month trial period where borrowers will have to pay the mortgage at the new rate. This was the trap in HAMP, as borrowers didn’t get an answer on a permanent modification after three months, waited, and were then hit with a denial and a demand for the difference between the trial payments and the original mortgage within days to avoid foreclosure. Looks like BofA may be setting the same trap. To call this a “penalty” for these banks, or a first step or a down payment or whatever it is Shaun Donovan is calling it these days, should only provoke laughter.

So the question is, how many people will actually be able to obtain the reductions? The process of getting it doesn't seem easy. Only the recipients of the letters are eligible and, as a Bank of America official points out, if someone misses the letter in the avalanche of mail that BoA sends its customers, they lose their opportunity. In order to qualify:

Executives say borrowers receiving the letters are eligible, but they still have to prove they qualify. In order to be eligible, a borrower must be 60 days late on the mortgage payment as of Jan. 31, 2012. The borrower has to owe more on the mortgage than the home is currently worth, commonly known as being “underwater” on the mortgage, and the borrower’s loan must either be owned by Bank of America or serviced by Bank of America for an investor who is allowing the modifications. In order to qualify for the modification, the borrower must answer the letter with full documentation of income, showing that under the terms of the modification they can still make the monthly payment. A borrower with no income would therefore not qualify. A borrower’s current monthly payment must be more than 25 percent of gross income, and the borrower must show they are unable to afford that. “If you can afford to make your monthly payment and are choosing not to, you will not get this principal modification,” says Sturzenegger. ... Not all of the 200,000 borrowers who receive the letters are expected to respond. Executives say there is a level of fatigue among delinquent borrowers who have already received several notices or who may have gone through a failed modification process already. Some borrowers simply don’t want to stay in their homes, while others may think the offer is a scam.

Even if all 200,000 borrowers were to successfully participate in the program, Bank of America services a million loans that are currently underwater, so the vast majority of the struggling families that BoA deals with will get no assistance.

So right before the company has its shareholders meeting, it announces a big program to reduce principal and goes on a media campaign to make it seem like they're taking a chance of possibly paying out more than they are required to, yet they are making it difficult for people to actually obtain the reductions and they aren't actually making any promises. It remains to be seen how much reduction they'll actually follow through on.