Amid mounting pressure for mortgage bankers to cut troubled homeowners some slack, Bank of America has announced it would begin a program of reducing some homeowners' principal, not just the terms of the loan.
A reduction in principal would be of most help to homeowners who are "underwater," whose home values have declined to the point where they owe more than the house is worth.
Bank of America said the program will be limited and offered on a case-by-case basis. But it comes in response to pressure from the Obama administration for it, and all other servicers, to step up efforts to modify troubled mortgages under the federal mortgage modification plan.
Under the announced plan, Bank of America will look first at principal forgiveness -- ahead of an interest rate reduction -- when modifying certain subprime, Pay-Option and prime two-year hybrid mortgages qualifying for its National Homeownership Retention Program (NHRP). It's introducing an earned principal forgiveness approach to modifying mortgages that are severely underwater.
The program changes are designed to encourage greater customer participation in the company's homeownership retention programs.
Bank of America said it developed and launched the NHRP in 2008, in cooperation with state attorneys general, to provide assistance to Countrywide borrowers who financed their home with certain subprime and Pay-Option adjustable rate mortgages (ARMs). Bank of America removed these from the Countrywide product line upon acquiring Countrywide in July 2008, the bank said.
Targets Countrywide borrowers
The new program is targeted specifically at Countrywide borrowers, many of whom are currently underwater because of the declining real estate market and the nature of the loan.
Under one scenario, some amount of the principal might be separated from the loan and maintained in an interest-free account. As long as the borrower continued to make payments, a portion of the suspended equity would be forgiven each year until the balance is zero or the marketed recovers to the point that the homeowner has positive equity.
"At the same time earned principal forgiveness helps homeowners, it also recognizes and addresses the interests of mortgage investors by ensuring that forgiveness is tied to the homeowner's performance, reducing the probability of a future default under the modified terms, and adjusting the total amount to be forgiven in light of any gains in property values that might occur in an economic recovery," said Barbara Desoer, president of Bank of America Home Loans.
Bank of America said it expects to be operationally ready to implement the new principal reduction components of NHRP in May. The bank will identify mortgages that may be eligible for these solutions and proactively contact those customers to ascertain their interest in a modification and to request documents necessary to determine actual eligibility.