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On Monday, Financial Times reported that Bank of America Corporation (BAC - Analyst Report) plans to slash its current $850 billion troubled homeloan portfolio by about 50% over the next three years. This was stated by Terry Laughlin, who is heading the company’s mortgage modifications and foreclosure programs.

BofA’s primary strategy is to address problems related to the housing crisis and the company’s purchase of Countrywide Financial. The company had acquired Countywide in early 2008.    

During the first quarter of 2011, the company formed a new division, named Legacy Asset Servicing, in its Consumer Real Estate Services segment to better manage these problem loans.

BofA’s financials have been heavily threatened as a result of significant growth in bad loans. Laughlin commented that in order to combat this threat, the company’s main strategy would be to cut the bad loans to about $450–$500 billion during the next few years.

The curtailments will likely be done by selling or modifying those mortgages at discount prices that were originated by Countrywide but are no longer offered by the company.

At present, BofA owns about $118 billion of problem loans. Apart from these, the company also services a large number of loans. Out the BofA’s 4.2 million borrowers, nearly 60% continue to make timely payments, while the rest are at least three months past due.

Laughlin is in favor of a simplified modification process, where mortgage holders would be offered lower monthly payment options in order to tackle the large number of delinquencies. Also, BofA would ensure that the mortgage borrowers deal with a single employee and get the decisions regarding their loans within 30 days.

Earlier in March, BofA had announced that though the company’s other businesses would recover by 2013, its mortgage business would likely return to normalized profit only after 2014. During the first quarter, the company witnessed a plunge in profit as higher expenses from delayed foreclosures continued to weigh on its financial performance.

It was in October 2010 that BofA had temporarily halted foreclosures after the detection of various flaws in the documents. Apart from BofA, JPMorgan Chase and Co. (JPM - Analyst Report) and Ally Financial Inc. had also stopped foreclosures. Following the detection, the regulators and the state Attorney Generals (AGs) started an inquiry into the matter.

Finally, in mid-April, the regulators announced an agreement, according to which the 14 largest mortgage servicers, including JPMorgan, BofA and Well Fargo & Company (WFC - Analyst Report), would review all foreclosed loans since 2009 and compensate the losses caused by the foreclosure mess.

To cope with this, BofA expanded its staff during the first quarter, in an attempt to strengthen its loan servicing business and handle the loan servicing backlog as well as review all the foreclosed loans.

However, last week, BofA’s mortgage servicing ratings were downgraded by Moody's Investors Service, the rating arm of Moody's Corp. (MCO - Analyst Report). The downgrade mainly reflects the deterioration in the company's collections and loss mitigation on home loans.

Hence, BofA’s commitment to improving foreclosure processes and reducing problem loans is a step in the right direction. This will likely strengthen the company’s balance sheet and enhance its financial results.

Currently, BofA retains a Zacks #4 Rank, which translates into a short-term Sell rating. Also, considering the fundamentals, we maintain our long-term Underperform recommendation on the stock.

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