Bank of America announced it will look first at principal forgiveness – ahead of an interest rate reduction – when modifying certain sub-prime, Pay-Option and prime two-year hybrid mortgages qualifying for its National Home ownership Retention Program (NHRP). The introduction of an earned principal forgiveness is being used to modify mortgages that are severely underwater. The program changes are designed to encourage greater customer participation in the company’s aggressive home ownership retention programs.
HAMP’s target for an affordable payment is equal to 31 percent of household income when modifying qualifying mortgages.
Qualifying mortgages are those that are sub-prime, Pay-Option ARM and prime two-year hybrid ARM loans that are at least 60 days delinquent with current loan-to-value (LTV) ratios of 120 percent or higher An interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years resulting in a maximum 30 percent decrease in the loan principal balance to as low as 100 percent LTV. In each of the first five years, up to 20 percent of the forborne amount will be forgiven annually for borrowers that remain in good standing on their mortgage payments. Forgiveness installments for the first three years are set at the 20 percent level. In the fourth and fifth years, the amount of forgiveness will be dependent upon the updated value of the property, so that the LTV will not be reduced below 100 percent through principal forgiveness.
The bank estimates that it will be able to offer these enhanced principal reduction solutions to about 45,000 customers who qualify for a HAMP modification, for an estimated $3 billion in total reduced principal offered under this NHRP enhancement.
For Customers with Pay-Option ARMs, BOA offers what it calls Innovative Solutions:
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.
From implementation of the NHRP in December 2008 through December 2009, Bank of America offered an NHRP modification or started an NHRP-eligible trial modification under the HAMP for more than 175,000 homeowners, providing potential aggregate savings of more than $7.2 billion over the full terms of the loans. The original program is ahead of schedule and certain to exceed original expectations of offering up to $8.4 billion in savings. The following excerpt was provided by Bank Of America and you are encouraged to read the BOA’s Full Press Release on Principal Forgiveness.
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