BofA breaks logjam, signs up for piggyback loan modification program

Here's hoping that lenders are just as much as lemmings as other businesses and join Bank of America in signing up for modifying 'piggy-back' loans as part of President Obama's $75 billion foreclosure prevention program. This is a big step in preventing foreclosures, as these lenders have traditionally been stuck in second place behind first mortgages and didn't want to take huge losses on short sales. From BuilderOnline.com:

Mortgage companies are finally starting to sign up for a long-delayed piece of the Obama administration's $75 billion foreclosure-prevention program.

The administration had been offering lenders who made so-called "piggyback" mortgages - second loans that allowed consumers to make a little or no down payment - incentives to lower payments or eliminate the loans entirely.

But no one signed up until Tuesday when Bank of America became the first to do so.

During the housing boom, lenders readily gave such second loans. While home prices soared, such mortgages were even extended to borrowers with poor credit and people who didn't provide proof of their incomes or assets.

Those loans are now an obstacle to alleviating the housing crisis. That's because piggyback lenders - fearing they won't be repaid - can veto a borrower's efforts to modify their primary mortgage..

If more lenders follow Bank of America it could clear the way for more mortgage companies to cut borrowers' principal balances on their primary loans. But administration officials appear wary of subsidizing such reductions with taxpayer money.

That could spark a backlash from critics who claim it's unfair to people who are still paying their mortgages on time and a bailout for banks that made reckless loans.

With foreclosures still at record-high levels, The Obama administration's program to aid homeowners has been a disappointment. Only about 66,500 borrowers, or 7 percent of those who signed up, had completed the program as of December.

The Treasury Department plans later this week to announce a streamlined process designed to get more borrowers to complete the loan modification program. The program reduces mortgage rates to as low as 2 percent for five years.

But many experts say more dramatic changes are needed.

"Unless you modify principal, there is absolutely no hope of restructuring mortgages on a mass scale to keep people in their homes," Daniel Alpert, managing director of the New York investment bank Westwood Capital LLC said earlier this month. "Eventually their hand will be forced."

Lenders mostly dismiss "Hope for Homeowners" Bill

Remember that huge housing bill passed by Congress in July in which the FHA would re-write toxic mortgages if lenders would only reduce loan balances by 10%? Apparently lenders are saying "Thanks for thinking of us, but no thanks, we'll do our own workouts. Have a nice day!" From a CNNMoney.com story:

As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.

But at a congressional hearing today in Washington, lenders didn't seem terribly enthusiastic about the program, dubbed Hope for Homeowners.

The program calls for lenders to voluntarily refinance delinquent mortgages by reducing loan balances to 90% of a home's current market value. The new loans will be backed by the FHA, which will be receive 5% of the new loan balance as a payment from the lender...

Bank of America (BAC, Fortune 500) managing director Michael Gross said that the new FHA program was just one of many loan workout options that the bank is employing.

And he stressed that the bank's own efforts to save troubled loans, especially those B of A inherited when it bought Countrywide, have been successful. He said that the bank increased its loan modifications by 450% this past August compared with August of 2007.

When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.

And Mary Coffin, speaking for Wells Fargo (WFC, Fortune 500), testified that relatively few of her bank's borrowers owe more on their mortgages than their homes are worth, meaning they would be unlikely to benefit from the FHA's refinancing and write down program...

Even Sheila Bair, who heads the Federal Deposit Insurance Corporation, praised the FHA program but said that few borrowers with IndyMac, the bank that the FDIC took over in July, would use it.

She said that her responsibility to maximize profits for the investors would probably limit the number of IndyMac borrowers who would take advantage of Hope for Homeowners