Principal Reductions of More than $100K

You may have a chance to reduce your mortgage balance if you have Bank of America, Ally Financial Inc., Citigroup Inc., J.P. Morgan Chase & Co and Wells Fargo & Co bank.

Under the arrangement, part of the recent $25 billion settlement of alleged foreclosure abuses between government officials and five large lenders, Bank of America will make deeper and broader cuts in balances than other banks.

The plan will offer qualifying borrowers a chance to cut their mortgage balances to their home's current market value. Other banks are required under the national settlement to cut principal to no more than 120% of the home's value.


Borrowers who qualify are expected to receive principal reductions averaging more than $100,000, a Bank of America spokesman said. The pact's total value will depend on how many borrowers take up the offer.

The agreement is the latest twist in the government's long-running effort to break a logjam in the housing market, by pushing lenders to cut loan balances to make it easier for borrowers to stay in their homes.

Bank of America is responsible for the largest chunk of the $25 billion settlement. The company is on the hook for $3.24 billion in cash payments to federal and state governments, along with $8.58 billion of principal write-downs, refinancings and other assistance.

Why banks agreed to this settlement?

The expanded program could allow Bank of America to avoid paying $350 million in penalties according to the Wall Street Journal.

Who will benefit from this settlement?

Homeowner will benefit from principal reduction. Banks will benefit from cutting their foreclosure process expenses by reducing principal balances and making people to stay at their homes.

The Obama administration official said that principal reductions will be done only when there is a benefit to investors, meaning that the cost of the principal reduction will be less over time than taking the loan through foreclosure, and the principal reduction is done in accordance with investor contracts.
Government officials hope that the broader settlement will pave the way for more widespread principal reductions.

Other banks said they are likely to reduce principal on some investor loans. Wells Fargo "will continue our practice of modifying loans in private-label securities and for those that allow it we will continue our practice of principal reduction," a company spokeswoman said.

A spokeswoman for J.P. Morgan said the bank "will continue to consider principal reduction as an option in evaluating customers for modifications...when the economics make sense." A Citigroup spokesman, while declining to comment on the settlement, said the bank has been doing principal reductions on investor loans when it is "in the best interests of our investors and allowable under servicing agreements."