Bank of America (Stock Quote: BAC) made big news nationwide recently when it announced that it would offer mortgage reduction deals to struggling homeowners — including those who took out risky option ARMs and other hybrid mortgages.
There’s little doubt that the demand for more lenient loan modification programs by struggling homeowners is rising.
According to RealtyTrac, the most recent survey of the U.S. foreclosure landscape is a grim one. In the first quarter of the year, the number of U.S. homes foreclosed by banks rose by 35% from the same quarter in 2009. Simultaneously, the number of U.S. homes edging closer to foreclosure grew by 16%, says RealtyTrac. “We're right now on pace to see more than one million bank repossessions this year," said Rick Sharga, a RealtyTrac senior vice president.
Maybe that’s why the news from Bank of America on March 24 created such a ripple — not only through the banking industry, but throughout millions of U.S. households, as well.
In a nutshell, Bank of America says it will prioritize principal forgiveness over interest rate reduction when examining risky mortgages. The new wrinkle comes at a time when the banking behemoth is, in its own words, “aggressively” beefing up its National Homeownership Retention Program (NHRP).
As part of its new NHRP efforts, Bank of America promises to:
- Take a first look at principal reductions in calculating an affordable payment through an earned principal forgiveness approach to severely underwater loans.
- Pursue principal forgiveness through a reduction of negative-amortization on certain pay-option ARMs.
- Add more conversions of certain pay-option ARMs to fully amortizing loans prior to a recast.
- Add certain prime two-year hybrid ARMs as eligible for the NHRP mortgage modification programs.
- Begin the inclusion of Countrywide mortgages originated on or before Jan. 1, 2009, as eligible for modifications under the terms of the NHRP.
- Add a six-month extension of the term of the NHRP program to Dec. 31, 2012.
Bank of America is the first of the big banks to take dead aim at the primary drivers of U.S. home foreclosures — high-risk, low-initial payment mortgages that have blown up in borrowers’ faces.
"The centerpiece of these enhancements is a program of earned principal forgiveness that addresses severely underwater mortgages with some of the highest rates of delinquency — specifically subprime loans, pay-option ARMs and prime two-year hybrid ARMs that are 60 days or more delinquent with a principal balance of 120% or more," said Barbara Desoer, president of Bank of America Home Loans.
But Bank of American is also careful to hedge its bets — it is leaving some wiggle room to “adjust” loan forgiveness programs if the housing market turns upward again.
Adds Desoer; "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."
Thus, the “graduated” staircase approach to bank of America’s principal forgiveness program. Actually, the bank calls it an “earned principal forgiveness” approach to mortgages that are at least 60 days delinquent on their mortgage payments, and which are seriously underwater (meaning their loans exceed the value of their homes).
Here’s a deeper look inside the “principal forgiveness” cornerstone of the bank’s program:
- An interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years resulting in a maximum 30% decrease in the loan principal balance to as low as 100% LTV.
- In each of the first five years, up to 20% 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% 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% through principal forgiveness.
In another groundbreaker, the bank says it may offer new mortgage terms to homeowners who signed off on Option ARM mortgages, which offer low initial monthly payments but balloon in size once the low-interest trigger expires, usually in three to five years.
Overall, Bank of America expects to reset $3 billion worth of mortgage loans to approximately 45,000 homeowners. If you think you qualify, contact Bank of America.
Just note that the program doesn’t really kick off until next month. Until then, non-Bank of America homeowners who have fallen behind on their mortgages have to wonder — will their banks step up to the plate, too?
If so, there’s no doubt we’re seeing a new era in the mortgage lending market — one where banks begin to take more accountability for risky loans they gave to homeowners, whether those homeowners understood the risk or not.
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