Bank of America to Offer Principal Reduction to Underwater Borrowers

This morning the mortgage news outlets ran this announcement that may be the start of banks passing on some relief to upside down home owners. Bank of America has announced it will make principal forgiveness– ahead of an interest rate reduction – the initial consideration toward modifying certain subprime, Pay-Option and prime two-year hybrid mortgages qualifying for its National Homeownership Retention Program (NHRP). An interest rate reduction and other steps would then be considered, if additional savings are necessary to reach the 31 percent debt to income targeted payment.

Under the plan BOA will forgive up to 30 percent of the mortgage loan balance in two stages, but with a quid pro quo from the homeowner.  The bank will offer an interest-free forbearance of up to 30 percent of the principal balance for five years.  If the homeowner stays current on mortgage payments for the period of time, then the amount will be forgiven.  On paper, at least, that forgiveness will allow the homeowner to return his loan to an LTV of 100 percent. Barbara Desoer, president of Bank of America Home Loans says, "Bank of America has found that many homeowners who owe considerably more on their mortgages than their homes are worth are reluctant to accept a solution that addresses only the amount of the payment without an accompanying reduction in the balance due on the loan." Homeowners who have certain payment option ARM mortgages will be helped under the new plan.

From the release:

• If the principal balance on the loan has grown because the borrower selected an option to make payments that did not cover the interest due and this payment difference was added to principal – known as negative amortization – the bank will consider offering a HAMP modification eliminating the negative amortization feature and forgiving all or part of the negative amortization amount to reduce principal to as low as 95 percent LTV.

• If a pending recast of a Pay-Option ARM will increase the customer's monthly payments, a preemptive modification that eliminates the negative amortization feature of the mortgage and converts it to a fully amortizing market rate loan may be offered.

• Other proposed changes include possible payment reductions on some prime hybrid adjustable rate mortgages and continuation of the bank's National Homeowner Retention Plan through the end of 2012, an extension of six months.

Bank of America is among the servicers who have been criticized for their performance under the Making Home Affordable Program (HAMP).  As of the end of February, the Treasury Department reported that the bank was servicing 1.09 million mortgage loans that were 60+ days delinquent.  Of those, 240,550 or about 24 percent had been placed in a trial program and less than 10 percent of those, 20,666 had been converted to permanent modification status.  While Bank of America is by far the largest servicer of delinquent mortgages participating in the HAMP program, its achievements rank well below other major participants such as J.P. Morgan/Chase and Citi which had enrolled borrowers at rates of 39 percent and 52 percent respectively. HAMP depends heavily on reducing interest rates to meet program goals.  Only 27.8 percent of the modified mortgages have received any reduction of principal. 

Bank of America estimates about 45,000 customers will benefit from the program for an estimated total of $3 billion in principle reductions. Many suspect the Treasury Department to announce a similar program in the weeks to come. If so this would be the first step in the right direction toward a recovery in the housing market.

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