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Bank of America’s Mortgage Reduction Program – The Only Way to Go?

On Wednesday, March 24, 2010, Bank of America announced that it will forgive some troubled mortgage debt to provide assistance in stabilizing the economy and housing market, reports Solomon Finance.  With further dropping housing sales and house values and pressure from both homeowners and investors, the lending giant will start reducing mortgage balances to a select group, possibly leading other banks to follow suit if things work out well.

This post was written by Mia Nguyen

After unsuccessful attempts of stabilizing the housing market with interest rate decreases by many banks and the government reduction program, which helped less than 200,000 homeowners, Bank of America, recently announcing that it will stop overdraft fees due to legislation, is responding to cries for more help by giving mortgage debt forgiveness a try and avoiding last resort measures such as foreclosure, which can be devastating to both homeowners and banking portfolios.

However, B of A’s mortgage debt reduction  is not an easy way out available to everyone: the program will be accessible by invitation based on certain criteria. To start, Bank of America will extend this program to homeowners, with mortgages initiating from a purchased company in 2008, Countrywide, the most aggressive lender during the housing boom, with proof of payment difficulty and balances exceeding 20% of their property value.  In addition, Bank of America will only allow up to a 30%  reduction of the principle value.

Although the mortgage principle reduction program is favored by many, someone will have to pay for it and precautions must be made to not upset homeowners who are able to and or making timely payments and who may perceive this extra help as an unfair advantage. “You have to be careful not to design a program that would change… in a destabilizing way or would be widely perceived as unfair to people who are continuing to pay,” says Michael S. Barr, assistant secretary of the Treasury.

In response to continued housing downslides, evident that existing efforts, or lack thereof have not been effective in providing property value, neighborhood and economic stability, BofA’s action of  “giving some to get some” could be the only way to get things back on track.