Citi, BofA Plan Discount Mortgages for Tainted Borrowers

Citigroup Inc. (C) and Bank of America Corporation (BAC) will offer mortgage loans at a discounted rate to borrowers with blemished credit histories or low incomes, going by a Wall Street Journal report. These two Wall Street majors, in association with the Neighborhood Assistance Corporation of America (:NACA), will assist struggling borrowers through a new loan program.

Under this arrangement, Citigroup and BofA will offer discounts higher than what banks usually offer to flawless borrowers capable of making larger down payments. Notably, discounts are offered in a mortgage loan in case a borrower pays ‘mortgage points’ in the form of upfront fees. If a borrower pays a mortgage point (which is equal to 1% of the total loan amount taken), he/she gets a discount of 0.25% in the mortgage interest rate. However, under this new loan assistance program, Citigroup and BofA will offer a 0.5% discount for a single mortgage point.

However, this loan arrangement comes as part of the settlements that the banks reached with the Department of Justice and other government bodies over the selling of shoddy mortgages prior to the 2008 financial crisis. These settlements require the banks to assist struggling homeowners, in the form of mortgage forgiveness, to borrowers who owe more than the value of the home, or lending to low-income borrowers who lost their homes in foreclosure.

Again, loans originated by NACA -- a Boston, MA-based, national, HUD-certified, non-profit, community advocacy organization – primarily target low and moderate income borrowers with a faulty credit history. NACA encourages banks to offer attractive deals to the struggling borrowers.

Banks also find it worthwhile to accept such offers from NACA. This type of lending in the vicinity of where the banks collect deposits augments the chances of receiving credits under the Community Reinvestment Act of 1977.

Nevertheless, irrespective of the underlying factors, this program will surely help many struggling homeowners to repay their loans.

Both Citigroup and BofA currently have a Zacks Rank #3 (Hold). Two better-ranked major regional banks are Wells Fargo & Company (WFC) and JPMorgan Chase & Co. (JPM), both carrying a Zacks Rank #2 (Buy).

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