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BofA Lags in Loan Refinancing

Zacks Equity Research

As per the quarterly filings, Bank of America Corporation (BAC) has not been able to complete a large number of mortgage modifications under the $25 billion settlement deal that also includes JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Ally Financial Inc. and Wells Fargo & Company (WFC). BofA’s commitment under the deal was $11.8 billion, including approximately $7.6 billion in borrower assistance, together with targeted principal reduction.

Under the settlement deal, these five banking majors are required to bring down the loan amount of about 1 million homeowners, who are at a risk of foreclosure. They will be required to firstly lower the principal loan balance to 100% of the present property value. Thereafter, they would have to reduce the interest rate and additional principal (if necessary) to arrive at the intended payment.

In May, BofA started reaching out to more than 200,000 potential homeowners by mailing them the invitations to participate in the loan modification program and provide necessary financial information. The company anticipates that on an average, these modifications will lead to a principal reduction of about $150,000 each. Additionally, customers who qualify for this program will be able to bring down their monthly mortgage payments by 30%.  

Yet, BofA is falling behind in the mortgage modification process as it is consuming more time to underwrite the modified loans. In comparison, JPMorgan, in its quarterly filings, stated that it has wrapped up a considerable part of loan modification program. Likewise, Wells Fargo anticipates finishing its mortgage modification process two years prior to the target date.

BofA stated that interest rate modifications are anticipated to include nearly 20,000-25,000 loans (underwater properties) that in total have $5.4-$6.8 billion in unpaid principal balance. Further, with an average interest rate reduction of about 2%, the company expects an annual decline of roughly $100–$130 million in interest income.

Though the settlement deal came as a big relief for the banks, they are required to meet targeted commitments or pay fines instead. If BofA and four other banks are not able to meet the targeted modification commitments over a period of three years, then they could face penalties of 125–140% of the deficit. These banks are required to complete 75% of the targeted commitments by the end 2014 and the remaining in the next 12 months.

BofA is already reeling under the impact of the sluggish economic recovery and effects of the various regulatory reforms. Hence, its slow mortgage modification procedure could lead to huge financial implications.

BofA currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long term ‘Neutral’ recommendation on the stock.

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