March 24, 2010 by Staff eCreditDaily.com
Bank of America will start to consider limited principal forgiveness – before interest rate reductions – in its foreclosure rescue efforts when reviewing certain subprime mortgages which were common during the housing bubble buildup.
The targeted mortgages for writedowns are qualifying subprime pay-option ARM and prime two-year hybrid ARM loans.
BofA is calling it “earned principal forgiveness” and it applies to these types of loans taken out by borrowers that are 60 days or more delinquent with a principal balance of 120 percent or more loan-to-value.
The program is initiated with an interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years. The permanent writedown amount can be a maximum 30 percent decrease in the loan principal balance, to as low as 100 percent loan-to-value. The borrower must remain in good standing on their mortgage payments for the five years.
The top U.S. lender based on assets, Bank of America becomes the first to launch a substantial strategy of principal reduction to help stem the growing epidemic of negative equity, or ‘underwater’ borrowers whose homes are valued higher than the mortgage principal.
Bank of America has the highest number of active mortgage modification trials under the government’s Home Affordable Modification Program, HAMP. The government program is under intensifying criticism for helping too few distressed borrowers and failing to implement widespread principal reduction.
Bank of America’s extended foreclosure prevention effort will focus on principal forgiveness through a reduction of negative-amortization on the pay-option ARMs (adjustable rate mortgages).
The program will include conversion of certain pay-option ARMs to fully amortizing loans prior to consideration for principal forgiveness or modification.
“With implementation of these enhancements, Bank of America will make principal reduction the initial consideration toward reaching the HAMP’s target for an affordable payment equal to 31 percent of household income when modifying qualifying subprime, Pay-Option ARM and prime two-year hybrid ARM loans,” Bank of American said today.
Bank of America said it expects the new program to be operational in May and will identify mortgages that may qualify before contacting customers “to ascertain their interest in a modification and to request documents necessary to determine actual eligibility.”
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