If you loaned your brother-in-law $10,000 to buy a car and he spent that money on a car that was only worth $5,000 and then when he realized what he had done he decided he wasn't going to pay you back...what would you do, assuming breaking his kneecaps is not an option? Well, as painful as it might be, you might tell him to just pay you back $5,000. At least that way he has enough skin in the game to motivate him to pay the loan back. Of course, having been rescued from his foolishness once he might be inclined to repeat his mistakes in the future, but who looks that far ahead anyway?
Presumably this is the logic behind Bank of America's
principal reduction Earned Principal Forgiveness program announced today. Their press release, which reads like it was written by lawyers, hints at the logic:
In our experience with Home Affordable Modification Program and National Homeownership Retention Program modifications, Bank of America has found that many homeowners who owe considerably more on their mortgages than their homes are worth are reluctant to accept a solution that addresses only the amount of the payment without an accompanying reduction in the balance due on the loan
In other words, if we don't reduce the principal they're going to walk.
The devil is in the details but the gist of the program is to identify mortgages that are 20% or more above the underlying value of the property and to reduce the principal of those mortgages by up to 30%, so that they become equal to the market value over the course of 5 years. In order for the principal to be reduced the homeowner must make their payments on time.
Having dealt with various departments within Bank of America over the last couple of years I wish people the best of luck in even trying to find someone there that has heard of this program.