Bank Of America Sets Troubling Standard

May. 9.12 | About: Bank of (BAC)

With each and every passing day it seems companies and our own government take measures that indescribably strive to merely elongate our own economic crisis. Whether turning a blind eye to rising gas prices to baiting us with electric cars to even taking steps to weaken our own currency while falsely denying the inevitable inflation, most in authority just don't seem to understand economics.

Neither, apparently once again, do the banks. As a part of the "$25 billion settlement reached this year between federal and state agencies and the nation's five largest mortgage servicers over fraudulent foreclosure document processing," Bank of America (NYSE:BAC) is in the process of mailing 200,000 letters offering customers principal payment reduction on their mortgages. Not interest reductions, but principal reductions.
Bank of America has already committed $11 billion to the program, but the bank executive in charge of the program, Ron Sturzenegger, emphasized that the company has the capability to go beyond that threshold. They will undoubtedly need such flexibility.

There are some qualifications for the program including the fact the borrower will need to be 60 days late on payment, the mortgage must be underwater and the loan must be through Bank of America. If those qualifications are met, the bank has offered to bring the household's monthly mortgage payment down to 25% of the borrower's income or possible mortgage forgiveness of over $100,000.

For the investor, Sturzenegger assures each loan was given a net value test which proved the modification will provide the institution or investor more than foreclosure would have. However, contrary to what a test may tell you, neither the bank, homeowner or investor is going to win with this program.

Now kicking more people out of their homes right now is assuredly not the brightest or most productive move for the banks. They're not in the business to own homes and selling a home at this point may take just as long as it may take for the current homeowner to make their overdue monthly payment. Still, to provide such forgiveness gives homeowners the wrong idea. It tells homeowners buying a home one can't afford is okay and leaves many with the belief they have a right to be helped.

As sympathetic as you can feel for the homeowner who faces eviction or sees little to no relief in sight, it was the homeowner who bought the home that now stands several thousand below purchase price. Many of these homeowners failed to look at important factors such as job security, market value and the future challenges of paying the monthly payment. Buying a home without doing this required due diligence is as crazy as believing a credit card should be maxed out to make it useful. Then, turning around and complaining the interest rate is abominable.

If this process is allowed to go through, it will provide doom for Bank of America and other financial providers who dare tag along. These banks will be left with smaller profits and more customers demanding lower costs and benefits. For the consumers, the negatives will be perhaps even more noticeable as they will be enticed to take on even more debt and left to throw away the financial common sense they may have picked up while their homes stood on the brink.

Finally, the future won't look any brighter for the investors of these banks. For as good and as noticeable as the short term benefits may be, the long term effects will come soon enough. Something tells me those long term effects won't involve solid debt management and on-time payments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.