Mixed Reaction to Bank of America’s Debt Reduction Offer

Bank of America announced on Wednesday that it would start offering debt reduction for homeowners who have an underwater mortgage. However, the offer has got a mixed reaction from industry analysts.

Bank of America has said that it would reach out to homeowners who are struggling to keep up with their mortgage payments and are likely to see a foreclosure of their property if no help is offered. The offer would be valid only when the mortgage balance exceeds the value of the property by at least 20%. The bank would choose about 45,000 homeowners to whom it would extend the offer of reducing their debt by a maximum of 30% in the next few years.

The scheme was welcomed by some analysts, who said that stopping foreclosures was good for the housing market. But critics say that the scheme is too small to have a big impact on the market. They say that the company may have extended this offer because it was anyway going to lose a lot of money if these properties went into foreclosure. Not only would the company would have fetched a much lower price for the property than the mortgage amount, it would also have to bear the costs of the foreclosure process.

Another view on the offer is that the housing market is still weak and getting even worse, which means that lenders are likely to see a wave of new foreclosures in the near future. New home sales have hit a new low since records began and they are now less than 25% of the level seen in 2003. If a property falls further and its value goes 30% lower than the mortgage balance, then the bank would lose the same amount that it is offering as a reduction to the borrowers. Simply put, the bank is doing nothing special for the homeowners.

The kind of principal reduction scheme that Bank of America is offering is nothing new, and other lenders have taken similar steps in the past to stop foreclosures. Critics point out that too many of such schemes could lead to a large scale behavior change of borrowers. People might start believing that there is no point in going through hardships to keep up with mortgage payments when you can get a loan reduction by missing payments. But this argument smacks of hypocrisy. If the banks can be bailed out, then why not homeowners?