Some banks, most notably Bank of America (Stock Quote: BAC), have created a novel way to help seniors get out of option adjustable-rate mortgages, and even save their home from foreclosure. It involves a unique twisting of the reverse mortgage story — only this one might have a happier ending.
The deal goes down like this. The Wall Street Journal reported this week that Bank of America had started a pilot program — only 20 cases so far — where the bank had kept senior homeowners in their homes despite the fact they were overwhelmed with Option ARM mortgage payments and facing foreclosure.
The Journal cited one California couple that owed $490,000 on a mortgage that appraisers now say is only worth $150,000. Bank of America wrote down more than $400,000 on the loan, and created a reverse mortgage worth another $85,000.
But unlike most reverse mortgages, where a reverse mortgage payment is given to the homeowner, Bank of America keeps the money but allows the homeowner to live in the home without having to make payments on the principal mortgage.When the homeowner passes away, Bank of America takes ownership of the home, although the homeowner’s heirs have the option of buying it back for $85,000.
In the end, that sounds like a pretty good deal for both the bank and the homeowner.
That’s fortunate, because neither party seems to have a choice. Banks are facing the grim reality of more and more homeowners who can’t keep up with their mortgage payments, especially seniors living on a fixed income who face increased monthly payments after option ARMs' high interest-rate triggers kick in.