BofA’s Mortgage Forgiveness on Track

As part of the execution of its previously announced mortgage forgiveness program, Bank of America Corp. (BAC) said on Wednesday that it has got in touch with 10,000 of the most distressed mortgage borrowers. According to the company, the first lot of modifications is expected to start in late June.
 
According to the agreement with state attorneys general to help homeowners who got high-risk home loans from Countrywide Financial, BofA announced in March that it would forgive about $3 billion in principal loan amount to about 45,000 troubled borrowers.

The borrowers had taken those loans before BofA acquired Countrywide Financial in mid-2008. However, following the acquisition, BofA has stopped such loans. According to the relief plan, BofA will offer up to 30% of total loan balances for homeowners who owe more than 20% of the value of their home and missed at least two months of mortgage payments.
 
The initiative to forgive some troubled borrowers’ total mortgage balances to some extent is part of an initiative started in 2008 under the bank's National Homeownership Retention Program.
 
Following the execution, BofA will be the first U.S. mortgage lender to take such a systematic approach to reducing mortgage principal to help distressed borrowers by preventing foreclosures.
 
BofA expects to get in touch with the remaining 35,000 customers over the next several years. In the expectation of losing a significant amount of money for this program, BofA has already started reserving cash. However, the loss is expected to be smaller than the loss the bank would have incurred had it chosen foreclosure. The federal government will pay 18% of the forgiven mortgage principal.
 
Among the other banks, Wells Fargo & Co. (WFC) has modified more than 52,000 mortgage loans it absorbed when it acquired Wachovia Corp. In addition, Wells Fargo had reduced the principal on those loans by more than $2.6 billion.
 
BofA’s first quarter 2010 earnings came in at 28 cents per share, substantially ahead of the Zacks Consensus Estimate of 9 cents. However, this compares unfavorably with the earnings of 44 cents in the prior-year quarter.
 
Strong capital markets activity and lower provision for credit losses were the primary factors that helped BofA bounce back to profitability after incurring significant losses for the last couple of quarters.
 
The market turmoil was more harmful to BofA than its peers except Citigroup (C). However, BofA concluded its biggest acquisitions in this period. Following Countrywide, the company acquired Merrill Lynch almost during the height of the financial crisis last year.
 
Though there remain concerns related to BofA’s inconsistent credit quality and net interest yield compression, we anticipate continued synergies from the company’s large scale operations and balance sheet restructuring. Finally, as the company has settled the litigation issues over its Merrill Lynch acquisition, there remains limited room for regulatory and legal pressure.

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