How to Legally Rob a Bank

In the newest installment of Infinite Moral Hazard Theatre, Bank of America (NYSE: BAC  ) recently more or less asked people to rob it. The bank announced that it's now forgiving part of the mortgage balances of some of its borrowers.

To qualify, it appears all you have to do is owe about 20% more than the house is worth, and be in some sort of financial distress. The bank will then take the amount you owe above and beyond the current value of the house, put it in a special account, and over time, forgive that amount of your debt.

Isn't that theft?
Interpreted charitably, this is yet another program that encourages risky behavior, not to mention the sort of speculative gambling that got us into the housing bubble in the first place. With a more cynical view, it appears more like Bank of America's executives may have just conspired with the company's customers to rob its shareholders. No matter how you slice it, offering free money to deadbeats is like handing crack to addicts -- a bad idea that will ultimately backfire.

The obvious problem with the plan is the simple question of why anybody would continue to pay their mortgage if defaulting meant free money. From the looks of it, here's the chain of events needed to qualify for this cash:

  • Buy a house you can't really afford with too small a down payment.
  • Stop paying on the mortgage (thereby demonstrating "financial distress").
  • Agree to pay a smaller mortgage amount.
  • Wait for the bank to forgive your debt.
  • Keep your house, and any appreciation that you might get when the market recovers.

And with that program, deadbeats are allowed to buy and keep houses they can't afford, and simultaneously punish savers and investors. And yes, people who are responsible with their money will pay (and are paying) for the bank's largesse. After all, that 'free money' has to come from somewhere, and that "somewhere" will likely be depositors, investors, and perhaps even taxpayers (again), who could wind up stuck with yet another bank bailout.

As this chart shows, Bank of America depositors are already paying for the bank's generosity, through lower interest rates on deposits than at other FDIC insured institutions:

Bank

1-Year CD rate
as of (3/25/2010)

Bank of America

0.80%

Banco Popular (Nasdaq: BPOP  ) , via E-LOAN

0.90%

ING (NYSE: ING  )

0.99%

Allstate (NYSE: ALL  ) Bank

1.15%

AIG   (NYSE: AIG  ) Bank

1.49%

American Express (NYSE: AXP  ) Bank

1.50%

Discover (NYSE: DFS  ) Bank

1.59%

Of course, to be fair, Bank of America's rates are closer to its large, money-center bank competitors such as Citigroup (NYSE: C  ) and PNC (NYSE: PNC  ) . From a saver's perspective, however, an FDIC-insured account is an FDIC-insured account. Why would you voluntarily lock your money up for lower interest rates at a bank that's actively handing out your cash to people who don't pay their debts?

The way things are going, it may only be a matter of time before savers need to pay Bank of America for the privilege of watching the bank throw their money away on gifts to deadbeats.

Charity is a wonderful concept. But when a bank shortchanges depositors and investors to give away tens of thousands of dollars to irresponsible borrowers, that's not charity -- it's theft. Why anyone with a chance of qualifying for this free money would continue to pay on their Bank of America mortgage at this point is beyond me.

As a shareholder (for now, at least), I fear this will turn out to be yet another way this bank is proving itself an incompetent steward of my money. If the delinquencies increase in response to this offer of tens of thousands worth of free cash for not paying the loan back, the bank will only have itself to blame. It's a pity, however, that as a shareholder when this atrocity was announced, I've already been forced to number among those footing the bill.

Those are my thoughts. Share yours in the comments section below.

At the time of publication, Fool contributor Chuck Saletta owned shares of Bank of America, but probably not for much longer, thanks to its announcement of this program. Chuck also owns shares of American Express and Discover, but he's nowhere near as livid at those institutions, since they're not throwing his money away. American Express and Discover Financial Services are Motley Fool Inside Value recommendations. The Fool's disclosure policy used to think that crime didn't pay, but it's reconsidering that line of thinking in light of recent events.


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  • Report this Comment On March 26, 2010, at 12:31 PM, lution wrote:

    Guess I shouldn't be suprised that they don't add the forgiven amount as a lien/contract amount that is paid back if the house sells for more than the new balance of the loan.

  • Report this Comment On March 26, 2010, at 12:34 PM, lemoneater wrote:

    I sold my shares to BAC last year. I was out of my depth figuring what would happen next. I didn't like how what I thought was a stodgy blue chip acted like a volatile penny stock.

  • Report this Comment On March 26, 2010, at 12:38 PM, TMFHousel wrote:

    Of course, banks don't have to cut principal, so it's a stretch to call it robbery. And with most modifications, banks make you submit bank account and pay stub information, so faking hardship isn't as easy as it's made out to be.

    I get the anger. It's justified. But I think cutting principal is the smartest and most profitable move for banks to make.

  • Report this Comment On March 26, 2010, at 12:40 PM, TMFHousel wrote:

    Or at least for banks to make at this point. Not making the loans in the first place would have been preferable.

  • Report this Comment On March 26, 2010, at 12:44 PM, ETFsRule wrote:

    What a weird article. It's as if the author has been living in a cave for the last 3 years and is unaware of predatory lending practices, subprime loans, the housing collapse, etc.

  • Report this Comment On March 26, 2010, at 12:57 PM, SamLBronkowitz wrote:

    ETFsRule - I don't understand how the housing collapse should factor into this.

    If the person bought the house to quickly flip it, yes they would be underwater, but they are really just a speculator who doesnt deserve any help

    If they were planning on staying, and stop making payments since they are underwater, it woudl be like an investor buying stocks on margin, having them tank, and asking for a handout.

    Someone who bought a house to actually live in (as opposed to an investment) can ride out the temporarily lower prices.

  • Report this Comment On March 26, 2010, at 1:44 PM, Timmol wrote:

    Banks forgive principal for one reason -- it will save them money. An up close view of the foreclosure process will demonstrate that in addition to the loss of principal, there are significant costs and delays associated with it. BOA likely determined that the combination of avoiding those costs and good will for what appears to be a customer-friendly initiative is overall good for business going forward.

  • Report this Comment On March 26, 2010, at 2:04 PM, RipRagge wrote:

    You fail to note whether this is going to be an ongoing program, or is merely a charitable move for existing customers in financial straits. If it's the latter, it seems like very good stewardship as compared to foreclosing on mortgages, evicting momebuyers, and selling defaulted mortgages for pennies on the dollar.

    Also, a little forgiveness of existing customers will go a long way toward attracting new customers. I might just buy some BAC based on this news.

  • Report this Comment On March 26, 2010, at 3:43 PM, Idahosehead wrote:

    Bring back debtors' prison!

  • Report this Comment On March 26, 2010, at 3:56 PM, pedorrero wrote:

    Let's not forget to tar & feather some of those who profited (and still will profit) from such moral hazards:

    The financial industry (not just banks, but the mortgage originators, can you say FEES? FEES? FEES?)

    The unelected (and largely untouchable) government employees who allow(ed) such irresponsible behavior;

    Attorneys public and private, who stand (stood) ready to sue anyone who did not participate in the generous lending (or looting of America, your choice)...

    And above all...politicians who have put into place a ton of progressive and perhaps well-intentioned laws and policies, but never forget THAT IT IS THE POLITICALLY WELL CONNECTED WHO PROFIT AT THE EXPENSE OF THE LESS POWERFUL.

  • Report this Comment On March 26, 2010, at 4:04 PM, mpendragon wrote:

    Banks lose a lot of money foreclosing on homes in good times and times are not good for trying to sell houses. If they can work out a mutually beneficial agreement where borrowers can stay in their houses and banks can continue to keep getting more money than they can with a forclosure then I'm glad they came to an arrangement.

    The bank loses some money and the borrower's equity evaporated so I'd say they were both punished some for the bad deal they worked out. When banks do this with other businesses they call it a work down and their is no moral outrage with those.

  • Report this Comment On March 26, 2010, at 4:16 PM, mickisue wrote:

    Oh, please. It was also announced today that BoA is paying no taxes this year.

    How much have they collected, at greater than 20% interest, and $39 late fees and overlimit fees, from their credit card holders? How about the fees for honoring withdrawals from ATMs, or the practice of taking a large check that will put a customer over limit first in a day, so that the three other smaller checks that came in first can also be charged the $39 fee?

    I assume that you were fine with this, being a stockholder in that FINE financial institution. Or, any fine financial institution. Take your money and run. But don't tell the person who is now underwater on their mortgage, because the defaulting on toxic mortgages d/t the greed of investors, coupled with the gullibility of some people, that they should suck it up.

    BoA got HOW MUCH of my (and your) tax money to stay afloat? At 0% interest. Your faux outrage is a sad joke.

  • Report this Comment On March 26, 2010, at 4:30 PM, lilbsb4 wrote:

    Perhaps I don't understand, but I find it unfair that many Americans are doing everything they can to stretch funds and make ends meet to continue paying their mortgage, yet the ones who don't change their lifestyle to try and stay in their homes get off free? I've seen the houses in our neighborhood that are in short-sell situations and they have Cadillacs in their driveways and nothing short of all the luxuries in their homes. I find it VERY hard to believe that people cannot find a way to temporarily change their lifestyle to protect an investment/loan that they legally borrowed and are required to pay back.

    Why work so hard to have perfect credit and minimal debt if someone always bails those people out?

  • Report this Comment On March 26, 2010, at 6:04 PM, TMFKopp wrote:

    You may be overstating the case a bit here.

    Assuming we're talking about the same thing, the program you're referring to is extended to borrowers that qualify for both HAMP and BoA's National Homeownership Retention Program (NHRP). As Morgan pointed out above, you need to show actual hardship, which banks are taking pretty seriously right now.

    At the same time NHRP specifically deals with a certain subsection of legacy Countrywide loans -- specifically some subprimes and Pay-Option ARMs and now maybe some two-year prime hybrid ARMs. These were Countrywide products that have gotten a lot of attention from lawmakers and in a lot of cases might even fall under the heading of "predatory lending" (depending on who you're talking to). The subprime and Pay-Option loans in question were both discontinued when BoA bought Countrywide.

    In other words, it's not like BoA is opening up its balance sheet willy-nilly to underwater borrowers -- it's more like it's doing what it can to placate lawmakers on these questionable loans so it doesn't face something mandated from the outside.

    Also the scope really isn't that huge when taken in perspective. Supposedly 45,000 borrowers could qualify for this. I don't have updated numbers on BoA's total loan book, but at the time of acquisition, Countrywide alone serviced around nine million mortgages.

    Matt

  • Report this Comment On March 26, 2010, at 6:40 PM, footchester wrote:

    I own some BAC by default. When the thieves at Merrill Lynch gave themselves million dollar bonuses as the stock was falling toward $0, BankAmerica got the bright idea to rescue the Wall Street bank. So, I ended up with approximately $100 in BAC stock for every $1,000 I had invested in Merrill Lynch.

    When BAC announced that they were 're-branding' their investment branch under the Merrill Lynch name I sent them a letter that probably got me onto a homeland security list. 'Branding" your investment branch to highlight your relationship to a company run by thieves!!??!!

    Anyway, I've enjoyed the recent run-up in BAC (what stock didn't run-up since last March?) and want to get out before I get burned yet again by these guys. Can anyone suggest a bank without any felons in the executive suites?

  • Report this Comment On March 26, 2010, at 6:55 PM, badnicolez wrote:

    Should someone who bought a home in 2006, put down 20%, had a fully conforming loan, got a great interest rate, did everything right, and who, even after $25k more in additional principal payments, owes twice as much (literally!) than the house is worth be forced to stay?

    Are we "irresponsible" just because we had bad timing? Should we be forced to pay for the meltdown? No thanks! Already lost more than $150k in cash, not going to throw another $200k after it. That would not be in our financial best interest, not by a long shot.

    We'll walk away and rent and save two or three times for retirement what we could if we stayed. No "home" is worth paying more than four times market value (if you include interest).

    The market isn't going to stop falling until a way can be found (and this isn't it) to normalize mortgage balances for those of us who "did everything right."

  • Report this Comment On March 26, 2010, at 9:27 PM, RaiddinnRZ wrote:

    The only problem with this whole analysis is that it has been proven that the absolute best way to keep people in a house and to keep them paying their mortgage is to directly reduce how much negative equity they have.

    That should have been mentioned somewhere.

  • Report this Comment On March 26, 2010, at 9:28 PM, RaiddinnRZ wrote:

    The only problem with all of this is that it has been proven that the best way to keep someone in a house and keep them paying their mortgage is to directly reduce how much negative equity they have.

    That should have been mentioned somewhere.

  • Report this Comment On March 26, 2010, at 9:29 PM, xetn wrote:

    I just wonder if these principal reductions are being funded by taxpayers. Has BAC paid back all of their TARP yet? Just curious.

  • Report this Comment On March 26, 2010, at 9:44 PM, rd80 wrote:

    "Has BAC paid back all of their TARP yet?"

    Yes, BAC is completely out of TARP. It repurchased all the preferred stock Dec last year and Treasury auctioned off the warrants a few week ago.

    Between the dividends on the preferred stock and the warrant sale, TARP has made a bigger profit on BAC than any of its other 'investments' so far.

  • Report this Comment On March 26, 2010, at 9:47 PM, simonhs wrote:

    You all should have invested in Canadian Banks. All I've got to say.

  • Report this Comment On March 26, 2010, at 11:43 PM, donbcms wrote:

    I took all my old Countrywide (now BAC) CD's & MM paying .50%, rolled 'em over to local bank Value "Checking" @ 1.2%. Instead of BAC, How about calling it "BAD".

  • Report this Comment On March 27, 2010, at 12:55 AM, mimintx wrote:

    As a proponent of Move Your Money, I have never placed money in any of the big banks and I most assuredly would never invest in them. In fact, since the day banks were allowed to become holding companies one could have seen this coming. And if one didn't see it then (decades ago), then he should have seen it when Glass-Steagall was wiped off the page.

    As for foreclosures, no longer is it an automatic loss for the bank/servicer. Unless a property has been vandalized rendering it next to worthless, banks know they can get market rate. Make Home Affordable programs are not eagerly pursued by banks and BAC is not offering them as good PR or out of the kindness of their heart(?). They have no risk. These modifications and refinances are guaranteed through FannieMae/FreddieMac. Whatever flows through government to private enterprise is taxpayer funded.

    I disagree with those who think people are deadbeats and don't deserve help. Frankly, most homebuyers over the last several years have been naive and misled. You have to keep in mind that 75% of American citizens have a high school education or less.

    Badnicolez has a point. Banks have been dumping the debt of their mistakes on taxpayers and are heartily annoyed when they find ordinary citizens deciding to use the same strategies and tactics in order to guard their bottom line (i.e., survival).

    Pedorerro is mistaken if he thinks "unelected" government employees allowed this irresponsible behavior. Government employees are under the direction of the administration from which they get their working orders. Last I looked this debacle did not begin happening under the auspice of a progressive congress or administration.

  • Report this Comment On March 27, 2010, at 12:18 PM, dm2000dm wrote:

    Again, we are going to have a Japan like recover in the housing market.. We can either have the market correct or we can drag it out. For some reason we are choosing to drag it out and at the same time sticking the US Taxpayer with the Bill.

    This is a big win for the banks, they get to charge fees to reduce principal but it is the govt principal (fha, FNMA, FHMLC paper) they are reducing.

    Who do you think is going to pay? The US Taxpayer! I really don't want to make my neighbors Lexus payment.

    Again, nobody is talking about all the people who used their house like an ATM (Cashout all the equity at the top) and now want the rest of us to pay their mortgage payment. So little of the problem is from bonafide purchase transactions.

  • Report this Comment On March 27, 2010, at 12:19 PM, dm2000dm wrote:

    Again, we are going to have a Japan like recover in the housing market.. We can either have the market correct or we can drag it out. For some reason we are choosing to drag it out and at the same time sticking the US Taxpayer with the Bill.

    This is a big win for the banks, they get to charge fees to reduce principal but it is the govt principal (fha, FNMA, FHMLC paper) they are reducing.

    Who do you think is going to pay? The US Taxpayer! I really don't want to make my neighbors Lexus payment.

    Again, nobody is talking about all the people who used their house like an ATM (Cashout all the equity at the top) and now want the rest of us to pay their mortgage payment. So little of the problem is from bonafide purchase transactions.

  • Report this Comment On March 27, 2010, at 12:36 PM, jian1122 wrote:

    50%off ca,ed%

  • Report this Comment On March 27, 2010, at 12:52 PM, 0xbeefcafe wrote:

    badnicolez:

    I wish the best for you, and I hope your financial fortunes return. However, I take great exception to your comment, and will respond to it inline below. It is not intended really just for you, but for all of those walking away from underwater homes because the paper value has changed:

    "Should someone who bought a home in 2006, put down 20%, had a fully conforming loan, got a great interest rate, did everything right, and who, even after $25k more in additional principal payments, owes twice as much (literally!) than the house is worth be forced to stay?"

    Yes, or just sell it. Buying the house, like anything else, is a risk - even if it is perceived to be 'low risk'. It is a decision you made. A sign of maturity is to live with that decision.

    But in any case, if you bought the house to live in it, what does the paper worth of the house matter? Were the payments not something you could afford when you bought it? Even if your income has since fallen, that is your responsibility. If the risk associated with buying a house is not your responsibility, then whose responsibility is it? Do contracts mean nothing when signed with your name?

    It appears to me to be a major problem, when people take on risks (even if they do not take the time to think about the fact that it is a risk), and then refuse to accept the downsides that go with the risk.

    "We'll walk away and rent and save two or three times for retirement what we could if we stayed. No 'home' is worth paying more than four times market value (if you include interest)."

    Again, why did you buy this home? If you chose an ARM mortgage so that your payments fluctuated, that was your risk. If you had a fixed rate but lost your job or income, that was still your risk. If you thought it was worth living in at $X/month, why is not worth it now? Did you decide that the home was not intrinsically worth that much to you anymore? If so, I would consider that a sign that the home was overvalued when you bought it, and you knew it (or should have).

    From your post, it even sounds like this is a voluntary decision to walk away, based on what you perceive to be a good financial decision. Even if that is true (which I would caution you may not be the case), it is not ethical, which puts you in the same not so desirable category as those bankers pushing sub-primes and robbing shareholders - taking from others (fellow taxpayers, shareholders) for you own gain, without regard for what is right.

    At best, your decisions have been, shall we say, not very well thought out. At worst, they are completely unethical and/or immoral.

  • Report this Comment On March 27, 2010, at 2:23 PM, odelljones wrote:

    I teach Economics to High School students and I recommend they join a credit union. No fees, lower interest rates and honestly better service.

    I ask them one question: Where do you think the Mega banks get the money to pay their shareholders?

    YOU

    Credit unions generally are 1+ % lower on loan rates and more generous with interest than banks.

    In the 15 years I have taught, not one student has ever come back to me and said I was wrong.

  • Report this Comment On March 27, 2010, at 2:59 PM, devilsadvocte wrote:

    Many businesses hand in the keys of a building because if would be better in the long run financially. However, many of them are not on the verge of bankruptcy, recent examples are Morgan Stanley and (wait for it) the Mortgage Bankers Association. Their revenue and net income are in the billions.

    This is one of the problems with individuals/families. They don't treat their finances like a business. For the record, I've never missed a payment in my life, but I understand why someone would, if it meant short term survival or avoiding a financially disastrous long term.

    If someone had a situation beyond their control (for the most part) like a drop in income or something medical, would foreclosing on them be the "right" thing to do? Unless you're Ann Rand, most people would say "probably not", but they would understand the business needs to do what is best for the business. But now that most people's homes are underwater or very little equity, it's in the businesses best interest to work with them (financially and pr-wise).

    This plan seems to help distressed home owners and I thought I read in an another article that it's invitation only (but I might be wrong on that). Besides, if someone really wanted to hand in their keys, they're going to do it anyway. In this housing market, it may be in the banks/credit unions best interest to deal with writing down some principal rather than to deal with a foreclosure.

  • Report this Comment On March 27, 2010, at 3:55 PM, FutureMonkey wrote:

    Chuck. I am deeply offended by your shockingly poor and uninformed analysis. My brother and his wife are not deadbeats, crack addicts, or bank robbers.

    He like the majority of the target population for this program are not real estate speculators that got caught trying to flip properties in a superheated bubble. The majority are primary home owners, many first time home owners, that were unfortunate enough to live in markets where home prices have crashed 50% or more, have suffered medical disability (my sister in law, job loss (both my brother and sister) or other substantial reduction in monthly income not anticipated by them or their lender. I hope you and I are never in such a horrible circumstance. At least these "deadbeats" comparable to bank robbers and crack addicts in your article are ethical enough not to just mail their keys to the lender and disappear into the night, like so many of their neighbors. They are trying to work it out, pay their debts, and stay in their homes; quite the opposite of the social parasites you describe.

    As for your righteous defense of shareholders, I just don't understand your point? Are you saying that shareholders in BofA would be better served by foreclosure and auctioning the property than by principle reduction? I just don't know of any rationale economist that would agree with that conclusion.

    Finally, comparison of the BofA program to giving crack to addicts or criminal behavior (robbing banks) is ridiculous. Might as well say providing medical care to people with end-stage AIDS will backfire by encouraging the patient to engage in risky sexual behavior.

    Next time think a bit more before you write, try to understand all the facts not just those you selectively choose to consider.

    FM

  • Report this Comment On March 27, 2010, at 4:43 PM, TMFBigFrog wrote:

    FutureMonkey,

    The plight you describe seems like exactly the sort of thing that "Jingle Mail" [IE turn in the keys and walk away] was designed for. Heaven knows that if I were facing disability, job loss, and mounting medical concerns, with no equity, savings, or other source of cash, I certainly would not want to be stuck with a mortgage payment, property taxes, homeowner's insurance, maintenance, repairs, and upkeep on a home.

    After all, even if the mortgage balance and payment is reduced, in theory, the "owner" does not have any equity in the property and is still responsible for the (somewhat) smaller payments as well as the other responsibilities of ownership. In a situation as dire and potentially as permanent as the one you describe, even a mortgage modification that reduces principle somewhat likely won't really help do more than postpone the inevitable.

    Renting would seem so much easier and cheaper than 'ownership' in a case like that, especially if the disability I was facing was one such that I had to hire out the maintenance and repair work.

    -Chuck

  • Report this Comment On March 27, 2010, at 5:46 PM, larchmont1 wrote:

    Chuck Saletta's article raises two separate points -- 1) the shareholder value that BAC and other banks gave away by not understanding mortgage underwriting risk; and 2) the punitive tax the federal agencies have levied on responsible citizens who built savings.

    BAC gave away the sharholder value when it underwrote the mortgage, not when it reduces principal due. When it underwrote the mortgage, it gave the mortgagor 2 things -- cash to buy the house and a free put option to sell the house to BAC if the value of the home dropped below the face value of the mortgage. By cutting the value of principal due today, BAC is simply recogizing that the put is in the money. Cutting the value of principal due is actualy preserving shareholder value, by avoiding additional transaction costs that BAC would encounter should the homeowner opt for early assignment on the put option it holds (ie walk from the home). In other countries like Canada, banks don't give away a put option. If a homeowner defaults, the bank can elect for a Power Of Sale, where the homeowner is evicted, the house is sold, and the former homeowner conttinues to owe to the bank the difference between the principal due on the mortgage and the amount realized by the bank from the Power Of Sale procedure.

    The second issue Chuck raises is tied to the defacto near 100% tax on savers. When the financial system went into a tailspin in 2008, the Feds had to protect depositors or run the real risk of a crash and great depression no. 2. To protect depositors the Feds could have let banks fail, raised income taxes and funded the FDIC to cover all deposits in excess insured levels. Alternatively, the Feds could borrow money at low rates from the Chinese (and others), pump some equity capital onto bank balance statements (TARP) and help banks earn their way back to health by forcing depositors (savers) to lend to the banks at near zero interest rates. The feds chose the latter because it is not called a tax, even though it is and even though it falls squarely on the shoulders of the only group that did not participate in the borrow and spend orgy of the last decade. Why tax savers? Because they have money and it was the least politically unpalatable solution. To each according to its need and from each according to its ability. Still think we live in a fair market based system?

  • Report this Comment On March 27, 2010, at 9:07 PM, tresorejas wrote:

    BofA risks nothing by doing this. With the announcement the last few days that the Treasury and FHA will refinance a particular number of at risk loans through the banks, the banks can unload their riskiest loans. The banks win and we the people get shafted again.

  • Report this Comment On March 27, 2010, at 11:25 PM, Untrusting wrote:

    Most of the money that is loaned by banks is actually just "made up" and backed by a relatively small cash reserve. It seems to me that anything they get back is a profit.

    Calling this a loss is similar to companies that say they "lost" money because they didn't make as much as they expected.

    You can't lose what you never had!

  • Report this Comment On March 28, 2010, at 4:19 AM, jdlech wrote:

    Encouraging risky behavior? How is anyone supposed to borrow more than their house is worth these days? I'm sure there will be some efforts to make one self LOOK distressed, but I seriously doubt anyone would actually try to BE distressed just for a bank bailout.

    If anything, BoA is reducing their own risk by giving mortgages a greater chance of avoiding default. This will improve their own equity positions allowing them to borrow and invest more.

  • Report this Comment On March 28, 2010, at 8:29 AM, TopAustrianFool wrote:

    "If anything, BoA is reducing their own risk by giving mortgages a greater chance of avoiding default. This will improve their own equity positions allowing them to borrow and invest more."

    They are going to put it down as a loss and you, the taxpayer will pay for it. Its all going to come out of your pockets.

  • Report this Comment On March 28, 2010, at 10:01 AM, TopAustrianFool wrote:

    "Encouraging risky behavior? How is anyone supposed to borrow more than their house is worth these days?"

    That's not the point. As regulations change, there will be other type of financial risky behavior. And this will be encouraged by bail-outs and debt forgiveness, which is nothing but passing the debt to the rest of us. It is always difficult to predict what kind of adjustments speculators make as a result to regulations, but it is certain that if you bail them out, you will reduce their risk and encourage their speculation.

  • Report this Comment On March 28, 2010, at 10:04 AM, NoMoeMoney wrote:

    Not all areas of the country experienced the boom and bust of the housing market. Where I live in NY our market has been pretty stable throughout this whole episode and still is. Seems like a lot of people in the places that have these problems bought over price houses with 'free' money (subprime), got 2nd mortgages with 'free' money (equity) and are now walking way with 'free' money (BOA bailout). Wheres my 'free' money? Oh,that's right, I get to pay for yours (higher taxes). As one poster stated, houses with short-sale status have Cadillacs in the driveways and all the luxuries in their homes. Who's to blame for that, the rich banker, I think not Mr and Mrs greedy...

  • Report this Comment On March 28, 2010, at 12:54 PM, TopAustrianFool wrote:

    "Not all areas of the country experienced the boom and bust of the housing market. Where I live in NY our market has been pretty stable throughout this whole episode and still is. "

    That may be true, but you can't really tell since govt intervention has really skewed the effects of the bust. In some places there will be less foreclosures that you would have had without govt intervention.

  • Report this Comment On March 28, 2010, at 2:58 PM, justonemick wrote:

    What's funny is that all of our current worries about the future of America and the future of our kids, grandkids, etc. began with the "Housing Crisis".

    I don't see how we as an American society can recover from all of the imaginary money that was made/lost during that boom period. Granted, if someone sold their house for an unreasonable profit and turned around and reinvested it in another house (granted regional prices may throw this off), then in the end no money is really lost. That person should be able to sell that house if they need to move, and carry the principle balance with them to their new home without any penalty, and regardless of the value of the new home. This way, eventually, 20 yrs from now, they may actually have a home worth the principle they have paid for the first house. Some may say that a home is an investment and I agree, however it should be viewed as a savings account type of investment rather than one where you can "get rich" from it.

    I think this holds true until you get to the case where houses were sold/bought for speculative investment purchases and or people cashing in for retirement. The imaginary money profited via those routes is unrecoverable. Personally I think that there should be a ban on, or a very low limit set, for "flipping" properties. Either the banks are going to have to help out the American people, people help other people, or leave it up to the Government. For me, I would prefer that the Government not intervene again in this matter, however that may be the only route.

    Greed is going to be the downfall of America unless we as a people individually start thinking not just about ourselves and our children, but rather our children's, children's children.

  • Report this Comment On March 28, 2010, at 3:21 PM, justonemick wrote:

    Realtor/Brokers made off like bandits during the bubble and no one is asking them to pay up. My wife and I both have very, very good jobs and have a pretty young family. We are also very conscientious about budgeting. We try to calculate every expense and make sure that we have room for life/health/car insurance, retirement funding, charitable contributions, (some) college savings for our children, and enough left over to enjoy our time here on earth. After all of that is calculated, we then look at whats left and determine how much we have left to buy a new house. If the housing need costs a little more at the time, then we do cut from other stuff, however prioritizing all the way.

    We had purchased our first house in 2001 and sold it in 2003. At this point we began to look for a new place to call home. Every time we looked, we thought the prices were too high and did not want to become house poor. It was very very hard not to buy into the hysteria. It was very hard not be envious/jealous watching most of our coworkers and peers purchase their own McMansion, while we sat back and rented, hoping that we could someday soon afford to settle down in the area.

    We kept delaying the decision to buy because I assumed prices would either stabilize or better yet drop. Our budget was going to allow us up to around 285K, however every house we looked at which we thought would meet our needs was around 350K. This kept creeping up until these homes were running 425K.

    I remember one time telling a Realtor that the home prices have to go down at some point and she said that "home prices never drop, they will just plateau". Of course I didn't buy that line, however to this day I want to slap her hard for every time she told that to someone. EVERYONE with some common sense KNEW that prices had to go down and not just a little.

    Well flash forward to 2008 when they began talking about the government intervening to stabilize home prices. Words can't describe how angry that made me at first. How come myself and my wife, the responsible ones, don't get to profit off of others mistakes? The housing prices still had a ways to go, I'd say about 10-15% (holds true today as well).

    Well since having a child in that time frame, I'd say my views have changed somewhat. In the end someone has to pay for the poor judgment and actions of a few that felt it was "a right to own a home" and that it was discriminatory to not lend money when the collateral and or income did not line up with the loan amount. Someone also needs to pay for the poor judgment of individuals, many of whom are my peers/coworkers, who made enormously bad decisions. Personally I would like to start taking the hit now so that my children's children will at least have a descent shot at achieving a lifestyle close to the one I've been able to achieve.

  • Report this Comment On March 28, 2010, at 3:23 PM, divedivapro wrote:

    I live in South Florida and my mortgage is about 150% he value of my home.

    I pay my mortgage on time, always have, but am retired with fixed income, and all I want to do is refi the loan from an adjustable rate to a fixed loan at today's lower prices. I am not interested in a principle reduction, just a simple refi.

    I cannot even get a banker to entertain the idea because the house value is underwater.

    Maybe if I stopped paying the mortgage, I could qualify for one of these generous programs.

  • Report this Comment On March 28, 2010, at 9:39 PM, OneLegged wrote:

    Mayhaps the alternative is much worse? I have read that the best estimates of BofA and Citibank each have 1 Trillion (that's $1,000,000,000) if off-balance-sheet crap to contend with. Forgiving 10, 20, 30, 40 or even 50% of a mortgage's balance can keep the Extend and Pretend going a bit longer. B of A is already insolvent. R.I.P.

  • Report this Comment On March 28, 2010, at 11:12 PM, Untrusting wrote:

    OneLegged: Actually, that is only a billion. A Trillion is a million million dollars and reads $1,000,000,000,000. I only mention this because we all throw around these numbers and don't ever show them longhand.

    Last I heard the banks were leveraged out on derivatives at about 40 times what their actual reserves were. Of course no one REALLY knows what the value of any of this stuff is.

    But as I said earlier- The banks never actually owned money equivalent to the mortgages, so they really can't lose anything. As far as I can tell, all banks are technically insolvent by the very nature of fractional reserve banking.

  • Report this Comment On March 29, 2010, at 12:05 AM, grendeth wrote:

    Honestly, is this typical American behaviour?. Who created all this speculation on the housing boom?. Now, I have known smart well educated middle class folks here who got into debt by purchasing their 2nd & 3rd homes with debt. Not to forget their jet skis and summer bikes.

    Sure, Alan Greenspan & Bill Clinton created this bubble by lowering interest rates and having a dreamy slogan, "Every house for a family...even if you really can't afford it".

    We laughed at the Japanese & their lost decade.

    Have you actually seen any change in our spending behaviour or the way we eat, dress & shop?. I don't see a great deal of change?. We are still a bunch of people living of credits, credits that the export orientated countries like China so stupidly give by buying our government bonds.

  • Report this Comment On March 30, 2010, at 2:28 PM, zblongladder wrote:

    Debt forgiveness like this isn't charity, it's smart business. To whit: if a mortgage holder is underwater, there's little reason for him to avoid foreclosure: he'll have bad credit for seven years, but he's probably just going to be renting in the near future, after that experience. There's really no good reason not to walk away, and the last thing Bank of America needs is another foreclosed house.

    However, that house is probably worth more as a home to the mortgage holder than as an asset to the bank. So, if they forgive debt to a level that the mortgage-holder can pay, there's a greater chance that he will pay it, and the bank takes less of a hit than if they'd just foreclosed on an unmarketable asset. Sure, they're cutting their losses, but they've already got more real estate than they can handle. And, most importantly, they don't have to mark their assets to market, which would lead to insolvency.

    Oh, and don't count on real estate appreciation being the eventual upside for these "deadbeats"...it's being estimated that, when appreciation returns, it'll be closer to the historical rate of 1.6%...lower than inflation. The days of a house as an investment are over.

  • Report this Comment On March 30, 2010, at 5:41 PM, gskinner75006 wrote:

    Hopefully the IRS will consider the amount forgiven income and at least the tax payers will get something out of it.

  • Report this Comment On March 31, 2010, at 10:17 AM, zblongladder wrote:

    @gskinner75006 That's generally how debt forgiveness works with the IRS, though this kind of gradual forgiveness will probably lead to lower taxes than if it were forgiven in toto.

  • Report this Comment On March 31, 2010, at 5:21 PM, bgilb301 wrote:

    They won't receive 90% of the money anyway; they might as well state they are only will to receive checks on such loans in clown money to send potential clowns to clown college.

    Maybe if they renegotiate the loans they will continue to receive payments and when they debtors sell their houses, they will receive the additional part of the loan. That is assuming the person living there waits to sell their house and the housing market recovers 20% in the foreseeable future (I personally would sell immediately).

  • Report this Comment On March 31, 2010, at 8:57 PM, wings4widow wrote:

    My husband died in 06 and when we refinanced in 05 I asked for mortgage protection insurance. The loan officer failed to provide despite numerous requests. I had such a heavy burden on my home it brought my 35 year old business down. I couldn't earn enough alone. I have twice been threatened by foreclosure because the tellers couldn't get my payments to record. I told them time and again I'd cure the default. Still they filed and tacked on more trustees fees to my overwhelming payments of over $4k a month. I paid years of 30% on credit cards when creditors beat me time and again for payment. I don't want gifts, I want a fair chance to save my home and business. While overhead is now reduced, bad news my business has been down for 5 months with no income. I'm handicapped, just got the business safe at home, and just too tired to move again. I refuse to surrender and ill do whatever I have to do to save my home come hell or hi water. I keep people off the welfare lines, albeit I could use a trip there myself right now. my life savings are gone. help small businesses get folks off unemployment and we just might be able to pay our mortgages. keep taxing and raising rates on me in hell and everyone gets burned. i'm recycling my bird food. God help us.

  • Report this Comment On April 01, 2010, at 2:48 PM, polenium wrote:

    Many of the people losing their homes were defrauded by lenders or victims of a financial collapse created by criminal greed and shady practices.

    Buying a home shouldn't be a risk, it should be a birthright. Especially a risk imposed on you by someone else over which you have no control.

    No one should buy a home under those conditions.

    Banks have been given nearly a trillion dollars of our tax dollars to provide relief to homeowners in order to prevent a deepening of the economic depression. To date they have been negligent in doing so and have been trying every trick in the book to profit from the misery imposed on their customers by their own highly questionable practices. They foreclose first on homes that have the highest homeowner equity.

    They delay short sales till buyers walk away etc.

    Banks were supposed to use the money we gave them to begin lending again. Instead they used it to beef up their bottom lines and engage in the same practices that brought the financial system to its knees.

    If you folks want to invest in white collar crime, why not invest the prisons that will eventually house many of the "brightest and best".

    They are no different from the guy who mugs you in the partking lot expect they hide behind board room doors. .

  • Report this Comment On April 01, 2010, at 3:37 PM, dillon53 wrote:

    My small little comment: Not only do I agree with Chuck, the same words essentially my husband and I used yesterday when we heard the "forgiveness" news. We live off $50K annually. We buy nothing we don't really need. We live as lean as possible. We don't have one penny in credit card debt. The only thing we pay off is the mortgage. Yes, we would love to go out to eat sometimes, but we won't. So, as things stand, many of those who do go out to eat, e.g., despite their horrendous debt, get bailed out with the money we paid in taxes while living lean. To say it mildly, I call this B S.

  • Report this Comment On April 02, 2010, at 10:02 AM, whamio wrote:

    BAC isn't stupid. They've raised my escrowe ammount by $200..why pay depositors when you can force paying homeowners to raise deposit levels. They pay depositors the lowest amount of interest huh i didn't know that....makes sense why they raised it now.

    anyone else's escrow amount go up 150%

  • Report this Comment On April 02, 2010, at 12:34 PM, fallwater wrote:

    Can not blame it all on irresposible borrowing but also on irresponsible lending. As a stock holder, if you do not like how business in done or that their risk reward ratio is off, and the return is loosy... By all means stop investing in that bank, consider borrowing and defaulting in order to get favorable policies of forginess on your principal.

  • Report this Comment On April 02, 2010, at 2:11 PM, jesterboomer wrote:

    It's essential for BAC and for all of us to put a floor under housing prices or we will be directly headed for depression #2.

    Far from deflation being helpful, it would be a disaster. How many more loans and households would be underwater.

    As an investor for retirement and a property owner who has lost money on financial stocks (Citigroup anyone) and seen assets devalued, I am absolutely p'd off with the banks, mortgage brokers and irresponsible borrowers that brought us to this point. However, in this instance BAC is doing the right thing.

    If home prices can stablize where they are, we get out of this recession once the excess inventory of homes is worked off. If not . . .

  • Report this Comment On April 02, 2010, at 4:27 PM, badnicolez wrote:

    0xbeefcafe -

    I fear you are missing the point entrirely.

    We CAN"T sell the house. It is worth $200k less than what we owe on it. We simply don't have that kind of money to give to the bank, and if we did, we'd pay cash instead for another house and own the exact same type of house outright!!!

    If we plan on moving (or retiring) any time in the next 20 years, and we do, we would likely still owe more than the house was worth, even after making more than $768k (!!!) in payments.

    For all practical purposes, we're now paying very expensive rent for what we were supposed to have "bought."

    Considering that the value of the home is still plummeting (every few months I call the bank to ask what they have the house valued at, and it's literally $20-$30k less every time), it might take more than 20 years to have any equity at all.

    We are fulfilling the contract we signed when we purchased the house, which states that if we stop making payments, the bank gets the house. Well, they can have it.

    What I don't understand is why the banks are perfectly willing to sell the house at auction for probably a lot less than we would be willing to pay to stay if they simply reduced our principal to a reasonable amount that was closer to the current market value of the house.

  • Report this Comment On April 03, 2010, at 7:28 PM, pathans29 wrote:

    In regards to this article I definitely agree that during these times the people financially responsible are paying for the irresponsible. There are people that are spending all their income & probably are heavily in dept to support a materialistic lifestyle & when the times get tough they are the ones to be the beneficiaries of all these programs which in effect reward this behavior. In my mind it should be the other way around but in reality the system is designed to promote ultimate spending to grow the economy & the political power. Materialism brings happiness to some but I can live w/o it.

    However, walking away from your worthless mortgage is perfectly legal & if it was me I would do it for sure. It makes no financial sense to me to keep paying for something that is not there when you have the lawful right to walk away & rent or buy a similar property for much less. Lets use the tools available to us to improve our lives.

  • Report this Comment On April 04, 2010, at 3:55 PM, kbeck02 wrote:

    At first I thought this article was another April Fools joke, but then I noticed it was published on March 26.

    So, home builders overbuilt, Real Estate agents hyped speculation, " Buy this house. I can get you an ARM, but don't worry about the first leg up on the rate, by then your house will have doubled in price and you can sell it and make a fortune." Mortgage companies gave people the crappiest loans known to humanity, and forced appraisers to over appraise house after house. Congress wiped out the Glass-Steagall Act under the guise of deregulation. Congress sold Fannie and Freddie, but guaranteed the loans, letting the "private shareholders" running those institutions do whatever they wanted with absolutely NO consequences, under the guise of "smaller government". It turned out that those "private shareholders" liked to use "accounting irregularities" and over estimated their capital, and understated their risk. You want greed, take a look at what happened there. Take a look at the bonuses the executives paid themselves, when, in fact, their companies were insolvent.

    No mention of any of this in your article. According to you ALL of this mess is due to the ignorant and/or stupid and/or greedy "deadbeat" general public. "About 4.5 million foreclosures filings are expected in 2010." 4.5 million on top of all of the foreclosures starting in 2007. There certainly are a lot of "deadbeats" in this country.

    Here is something else not mentioned in your article, for the most part the banks do NOT own the mortgages on these defaulting loans. They are merely the "Servicer." In 1995 the banks got together with the people who now own Fannie and Freddie and created MERS (Mortgage Electronic Registration Systems, Inc.). MERS then bundled the loans, sliced and diced them and sold them. "After banks issue mortgages to home buyers, they sell those mortgages to other banks, Fannie Mae, and Freddie Mac. There, the mortgages are pooled together into bundles of mortgages called a mortgage-backed security, which are then shipped off to other banks and China" (explanation provided by the Motley Fool web site) and other countries, think Iceland. Apparently MERS often is NOT "in possession of the original note endorsed in blank" and cannot prove they are the loan holder. If you are in foreclosure you should check on this (http://www.nytimes.com/2009/04/24/business/24mers.html?_r=1 http://lawprofessors.typepad.com/banking/2009/10/mortgage-el... http://trueslant.com/matttaibbi/2009/09/22/landmark-decision....

    I guess you haven't been keeping up with how far this housing bust has moved up the food chain. People with prime loans, who made 20% down payments and had good credit are now losing their homes to foreclosure. Many have lost their jobs. Some have had medical problems. A LOT are retired and were living off of the income from investments (remember the 401Ks everyone was hounded into investing in? AND for many were the ONLY retirement options available from their employers) which were wiped out by the stock market crash/housing collapse.

    Here is something else you might be interested in reading: http://earthhopenetwork.net/forum/showthread.php?tid=3832 I am sure B of A is doing just fine. Banks never do anything unless it benefits them. They are the biggest rip off artists in the world. I have been using community banks since my first encounter with B of A and Wells Fargo when I was a college student in the late 60's.

    "The program will be incorporated with the bank's federal government's Home Affordable Modification Program (HAMP)." It will most likely be the taxpayers footing the bill for this not B of A shareholders.

    "The centerpiece of these enhancements is a program of earned principal forgiveness that addresses severely underwater mortgages with some of the highest rates of delinquency – specifically subprime loans, Pay-Option ARMs and prime two-year hybrid ARMs that are 60 days or more delinquent with a principal balance of 120% or more," said Barbara Desoer, president of Bank of America Home Loans during a press conference today http://www.walletpop.com/blog/2010/03/24/how-bank-of-america....

    Underwater prime rate mortgage holders are left out of the program.

    The HEMP program is a joke. You can't get help until you are so far in debt that you will NEVER recover. That is why even the FEW people who have "benefited" from that program end up defaulting anyway. http://www.bloomberg.com/apps/news?pid=20601010&sid=aVYx... Half of U.S. Home Loan Modifications Default Again (Update1). People have been caught in this HEMP web for YEARS. The smart ones walk away early.

    We should have let ALL of the banks fail. Personally, I would rather help out a person who is losing their home than have my tax money spent bailing out one sleazy bank after the next.

    I think you need to do some research and at the very least get a fact checker.

    In an attempt to find your qualifications I did a Google Search. There were NO bios in the first two pages of links. Here is the only information I came up with:

    At: http://finance.townhall.com/Columnists/ChuckSaletta#Columnis...

    Chuck Saletta's Biography

    Chuck Saletta is a Motley Fool contributor.

    This is the information provided if I should have wanted to hear more of your uninformed ranting:

    Townhall.com Free. Registration

    Ann Coulter, Thomas Sowell, Walter Williams, Mike Adams, and all your favorite writers delivered straight to you.

    Maybe this says it all. Yet another Faux News talking head.

    This casts doubts on ALL of the "Fool contributors."

    I certainly hope fool.com does not publish this article again. And in the future bios are posted for all of your "contributors".

  • Report this Comment On October 18, 2010, at 2:00 AM, shortsmv wrote:

    And here I thought I was the only one to think of this idea... It really is simple. Get a mortgage on whatever, through a corporation that you create. Banks are being demonized so go for the ones that are being most demonized (check CNN, Huffington, Rachel Maddow, etc.) The government plan is to take down the banking industry. What you need to do is to be part of the takedown.

    Get your mortgage, wait for the bank to self impose restriction of foreclosure or even better - the government imposes foreclosure restrictions. The government is close to doing this. It is part of their plan to take down banks.

    Once a bank or government stop foreclosures, STOP PAYING! It will be such a mess that it will take years for them to catch up and/or you will have the opportunity to buy back for pennies on the dollar. Either way, the banks lose and you win. The rent you get from tenants, just put it in your pocket.

    One thing you can't do is not pay your taxes. Remember, the government wants you to screw the banks, not the government. Since you are making money by collecting rent and not paying your mortgage, the government will expect its cut. You win, the government wins and the bank loses.

    If enough of us participates in this plan, hopefully, the bank will fail. If that happens, in the chaos that will ensue, you might get the property for relatively nothing.

    All indicators are pointing to a bank meltdown. The press is reporting on how evil banks are to the public. (Like any industry there are some bad people, but, not to the degree that Gov't is talking about) Banks have been self imposing foreclosure halts. Lawyers have become ever more creative to stop foreclosures.

    Now is the time. If John, George and Jane are not paying their mortgage, and getting away with it, why should you???

    Morally, of course, this is wrong, but, if your neighbors get the bank or government to pay for their mortgage why shouldn't you?

    Google "Stop paying your mortgage" or read this link:

    http://www.signonsandiego.com/uniontrib/20081010/news_lz1e10...

    If we encourage enough people to stop paying their mortgage and the banks go under/government bails out, YOU CAN MAKE A HUGE PROFIT.

    After that it should be fairly simple. US currency will fall (it already is). Commodities such as oil and gold, at some point, will no longer be traded on the dollar standard further plunging our value. Commodities will continue to increase in value during the crisis. The US will no longer be king of the hill. Probably, China will be the next. I have about another 30 years to live, and I can only hope this process takes longer than that, but, I doubt it.

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