I think that in February 2013, most Americans are comfortable with the understanding that lots of mortgage lenders misled people into taking out loans for more than they could afford.
This caused housing prices to increase, until 2008 when there were no more people willing to take out these expensive loans, and the people who already had the loans found that they couldn’t afford the payments.
Many of these borrowers lost their houses and all of their savings. Many are still mired in debt and struggling to avoid bankruptcy or worse.
The mortgage lenders avoided much of the losses when borrowers stopped paying because the lenders had sold the loans to investors. This story is familiar to everyone by now.
But what about the investors who bought the securities that mortgage lenders produced from all of those loans? How have they come out now that we are moving into the fifth year of the housing bust?
Remember that they were told that the mortgage-backed securities that they were buying were as safe as buying government bonds (the safest thing to buy).
These investors are still losing money as the borrowers continue to default. Bank of America has even come up with a new way to make investors take losses. Read the following article:
In short, Bank of America is giving principal reductions (forgiving some of the loan balance) out of the pockets of investors. You may remember the $26 Billion Mortgage Foreclosure Abuse Settlement, as this settlement requires mortgage lenders to give principal reductions to some borrowers.
Bank of America has apparently been selecting a very small group of people to give principal reductions, a group that helps Bank of America, but hurts the investors.
Bank of America, which often still services loans that it has sold to investors, has been granting principal reductions of investor loans on properties where Bank of America has a second mortgage.
What this means is that the investors take a loss when the principal owed to them is reduced, but Bank of America gets a gain because their second mortgage (or HELOC) is now attached to a property with more equity.
Think about it, if the first mortgage has a smaller principal balance, then there must be more equity available for the second mortgage, making it more valuable. Very clever Bank of America.
This story should convince you that a moneylender is never “working with you”. They actively work against both sides for their own profit. The borrower who got a principal reduction feels good that their mortgage is now smaller, so maybe they will be able to afford the house. Maybe this convinces them to start paying the second mortgage again.
But who owns the second mortgage? Bank of America!! Thus Bank of America makes the investors take another loss, and convinces the borrower to pay Bank of America, and might even look like the good guy for granting the principal reduction.
The only problem is that the principal reduction was taken out of someone else’s pocket. Bank of America only has the power to do this because they are the servicer of the loan for the investors, and the US Government is making them grant principal reductions to some borrowers.