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Forgiveness of Debt: BofA to Lower Some Principals

By Tanya Roth, Esq. on March 30, 2010 1:45 PM

Are banks finally lowering mortgage principals? Until recently, debt negotiation and loan modification were the avenues of choice for many banks, if they even agreed to assist distressed homeowners. This involved perhaps adjusting interest rates and the length of the loan, but up to this point, not the principal amount owed. Forgiveness of debt was simply out of the question.

Until now.  

Bank of America announced last Wednesday that it planned to cut mortgage principal on some loans, in order to assist the distressed homeowners involved, in an invitation-only program for homeowners facing foreclosure.

The new program for distressed homeowners would work this way: if a borrower owes more than the amount the house is currently worth, the difference in the mortgage amount and the market value of the home would be moved into a special, interest-free account. So long as the owner continued to make payments on the loan, up to the market value of the house, $10,000 a year would be forgiven in the special account, until the balance was either zero or until the housing market recovered to where the borrower had positive equity. 

There have been several initiatives announced by the federal government to assist homeowners. Last year, there was also talk of the potential of bankruptcy judges being given the power to "cram-down" mortgages, essentially reducing the principal of mortgage loans in bankruptcy court. Had such legislation passed, many bankruptcy attorneys anticipated that the fear of court-imposed cram-down would coax mortgage lenders into lowering the principal on their own on some mortgages. 

Despite the fact that the cram-down legislation did not pass, Bank of America may be taking a big step in helping distressed homeowners. Earlier this year, CitiBank implemented a program designed to assist distressed homeowners who wanted to foreclose, allowing them a streamlined "deed-in-lieu" process. 

Perhaps the banks are responding favorably to the prodding by the Obama Administration. Perhaps it's simply a move that saves them the expense of some foreclosure. Time will tell.   

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