Principal Forgiveness: The New BofA Mortgage Deal

Photo: Sam llic

Starting next month (May 2010) or as soon as its operationally ready, Bank of America may reduce principal balances on certain mortgages of deeply underwater loans. This move expands the scope of its National Homeownership Retention Program (NHRP), which was established to make amends for predatory lending practices by Countrywide Financial, which Bank of America acquired in 2008.

The overview of the original program on Bank of America’s website is skimpy on details. A more detailed description of the new-and-improved NHRP indicates that eligible borrowers consist of those who:

  • Purchased a primary residence by taking out a subprime mortgage, Pay Option ARM (Adjustable Rate Mortgage), or Prime 2-year Hybrid ARM loan from Countrywide on or before January 1, 2009;
  • Are now 60 days or more delinquent on the mortgage loan;
  • Have a principal balance that is 120% or more of the market value of the home (LTV).

Loans are to be modified through 1) principal forgiveness and 2) interest rate reductions. The hoped-for result is a monthly mortgage payment that is affordable according HAMP guidelines AND a fully amortizing loan so that borrowers can avoid the scenario of making payments for decades but never shrinking loan balances.

In some cases, the principal reduction isn’t really about lowering the original loan balance to reflect market value but rather undoing the harm caused by interest capitalization associated with negatively amortizing loans. (In plainer language, if you owe more now than you borrowed a few years ago — because interest was added to your loan balance — then help might be on its way.)

But forgiveness isn't quick, simple, and all-encompassing. The following conditions may apply:

  • Principal reductions will be based on borrower performance over a period of 5 years
  • Loan term will be extended to 40 years (rather than a standard 30 years)
  • Arrearage (past obligations not paid) will be capitalized (added to the outstanding loan balance)
  • Principal amounts not forgiven (because there are limits to forgiveness, up to 100% LTV) will be “non-interest bearing and a balloon payment of the forbearance amount will be due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance.” (according to the Final Judgment by Consent   PDF indicating the settlement of a complaint filed by the Attorney General's Office of Massachusetts).

The program (both the original and enhanced NHRP) is part of a settlement of lawsuits filed by Attorney Generals of multiple states, such as:

Check the website of your state's Attorney General's office for details on loan programs that may relate to your situation. To see if you are eligible for National Homeownership Retention Program, check Bank of America's website.

Note that “Countrywide has initiated proactive outreach to eligible borrowers," which seems to mean "we’ll call you, don’t call us.” However, the legal agreements require assistance to a certain number of borrowers so Bank of America needs to find people to help. Borrowers can take action rather than waiting for a phone call.

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Guest's picture

My mortgage is not with BofA, (its with Wells Fargo) and I wish it were. I'm a recently divorced and struggling wth making my $1100 per month mortgage payments (interest 6.75). I did not qualify for a refinance at a lower rate because my credit score is 660 (dont ask why) or one that will make any real difference without a ton of up-front costs. I have two teenagers (13/15) and an elderly mother to care for. My job in law enforcement is about $48,000 gross. I have a ton of student debt (90's high interest loans with penalties). Because I have not missed payments, I am not eligible for any of these programs. I purchased my current home with double the salary in 2007 and now its worth about 35,000 less than what I paid for it. My lender talked about a short sale, but even that leaves me with no $ to move if it does sell (unlikely). So what can I do?

Julie Rains's picture

There is some talk about principal forgiveness for Wells Fargo borrowers; however, it looks like loans to be modified are the problematic ones such as the pick-a-pay (or pay option) loans or other types in which unpaid interest is added to the loan balance. If you have a traditional, fixed rate loan -- based  on the current deals -- it looks unlikely that those loans would be modified or principal forgiven. One of the lawsuits against Countrywide provided for relocation assistance but again, it depends on the type of loan.

A few ideas:  If your house has gone down in value, see if you can get your tax office to lower its valuation so that the property tax (which is most likely part of your payment) could be reduced as well as your monthly escrow and loan payment. Also, since you work in law enforcement and may be a public servant, look into special programs such as a forgiveness of student loans, special financing rates, or even special rates in homeowners insurance that may be available to public servants -- anything to reduce the monthly expenses.

Guest's picture

Given the current situation, I think the BofA plan seems fair.

1) A 40-year amortization allows BofA to reduce the interest rate less and continue to make money on the interest

2) Tacking the unamortized balance on the end lets BofA recover some of the value of the money, even though they make no interest

BUT, here is a problem for BofA. If BofA only offers this for their delinquent clients, then current clients will be forced to become delinquent to get a better deal.

Guest's picture

Principal forgiveness on loan mortgage provides an opportunity lo loan borrowers to adopt to current situation of increasing interest rate in market. This offer is somehow beneficial to them for the adjustments of their loans so as not to create further mismanagement of the loan that may result to some critical circumstances. Good thing for BofA to have come to this kind of mortgage deals.