BofA to Offer Principal Reductions of More than $100K

Some Bank of America borrowers may be in for principal reductions in amounts exceeding $100,000, according to the latest developments in the settlement the bank and four other large servicers made with state and federal regulators.

Of the five servicers participating in the settlement, BofA is set to pay the largest portion of the total $25 billion settlement. The bank will pay $3.24 billion to the government and $8.58 billion to borrowers.

Of BofA’s total, $1 billion is part of a separate settlement regarding loan origination issues for Countrywide, which BofA acquired in 2008.

While the other four servicers in the national settlement are being required to diminish principal so underwater borrowers have loan-to-value ratios of 120 percent or less, BofA will be reducing principal for about 200,000 homeowners to fall in line with current market values.

For some deeply underwater borrowers, this may result in reductions of more than $100,000.

The expanded principal reductions may prevent BofA from paying $850 million in penalties, according to the Wall Street Journal.

Fitch Ratings responded to the news stating that the 200,000 principal reductions will be “neutral to negative for some RMBS bondholders and potentially beneficial for the bank.”

Fitch suggests the loans most likely to qualify for the extended principal reductions will be those originated between 2005 and 2007.

“Because the bank has already reserved for penalties, any reversals could help BAC’s income going forward,” Fitch stated. “While the agreement will help the bank reduce the amount of penalties it owes over time, the aggregate best case benefit is moderate from a financial perspective.”