Bank of America announced a new strategy today to tackle the pesky underwater mortgages on its books, many acquired via its merger with Countrywide.
The so-called “earned principal forgiveness” initiative will target borrowers with subprime loans, option ARMs, and prime two-year hybrid ARMs.
For loans at least 60 days delinquent with current loan-to-value ratios of 120 percent or higher, the bank will offer an interest-free forbearance of principal that the homeowner can turn into reduced principal over five years if they stay current on mortgage payments.
“In our experience with Home Affordable Modification Program and National Homeownership Retention Program modifications, 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,” said Barbara Desoer, president of Bank of America Home Loans, in a press release.
Bank of America said it will make principal reduction the initial consideration toward reaching HAMP’s 31 percent debt-to-income ratio target when modifying the aforementioned loan types.
Certain holders of option arms may also receive a HAMP modification that eliminates the negative amortization feature and results in the forgiveness of all or part of the negative amortization amount to reduce principal to as low as 95 percent loan to value.
Of course that means the borrower will no longer have the ability to make ultra-low monthly mortgage payments, but BofA hopes the equity reward will be enough to avoid strategic default and foreclosure.
The bank and mortgage lender estimates it will be able to offer principal reduction solutions to 45,000 borrowers, representing $3 billion in total reduced principal.
Bank of America is also extending its National Homeownership Retention Program (its own loan modification program) for an additional six months to December 31, 2012.