BofA Begins Principal Reduction on Delinquent, Underwater Mortgages

Bank of America (BAC) is starting to forgive principal when modifying underwater mortgages eligible for the National Homeownership Retention Program (NHRP). BofA servicers will forgive principal for homeowners who owe “considerably more” on their mortgage than the current value of the home while being considered for the Home Affordable Modification Program (HAMP). BofA announced NHRP in March 2010. The bank will attempt a principal reduction as the first step in the servicer waterfall to reach the 31% debt-to-income ratio target – the amount of the borrower monthly income that goes toward the mortgage. Loans eligible for the NHRP include subprime, pay-option adjustable rate mortgages (ARM) and prime-quality two-year hybrid ARMs originated by Countrywide before Jan. 1, 2009. The amount of principal owed must exceed the property value by 20%, and the loan must be delinquent by 60 or more days. Through the five-year NHRP, BofA sets up an interest-free forbearance account for the amount of principal owed above the current value of the home. For instance, if the borrower owes $250,000 on a home worth $200,000 and qualifies for the program, BofA will set up a separate account of $50,000 that will sit alone without collecting interest while the borrower makes payments on the $200,000 at the current market interest rate. There are no required payments on the $50,000 non-interest bearing mortgage account. For the first three years of the NHRP, BofA reduces the separate account – the $50,000 in the example above – by 20% each year if the borrower remains current. Meaning after three years, $30,000 would be forgiven in the example. If, by then, house prices have gone up and the borrower is once again at a 100% loan-to-value ratio, BofA will no longer reduce the principal. If the borrower remains above 100% LTV, BofA will continue reducing payments for an additional two years. BofA will not reduce the principal on the non-interest bearing mortgage account if the sum of both mortgages achieves 100% LTV. “We believe the loss [through NHRP] will be smaller compared to foreclosure,” said Jack Schakett, credit loss mitigation executive for BofA Home Loans. The Treasury Department announced a similar earned principal forgiveness program for HAMP that will go into effect later in the year. But it ends after three years, opposed to the five-year possibility offered by BofA. Schakett said about 80% of the borrowers in the NHRP will not need to receive principal forgiveness after three years. Schakett added that of the BofA borrowers currently moving through the HAMP process, 45% had an LTV of more than 120%. “Our tests have shown that many homeowners who are severely underwater on their mortgages will respond positively to a modification offer that includes reduction of their principal balance, increasing the rates of acceptance of HAMP trial modification offers, conversion to permanent modifications and long-term success of the homeowner,” Schakett said. Schakett said the amount of borrowers who have strategically defaulted is more than they’ve ever experienced before. To meet the demand for modifications, BofA more than doubled its staff in the loss-mitigation department to reach out to these borrowers. The bank also opened the first of three “outreach” centers in Nevada, joining similar centers in California and Florida. BofA pushed its total number of permanent modifications under HAMP to 56,400 in April, up from 32,900 in March, for a total of more than 600,000 modifications through all available programs since January 2008. Write to Jon Prior.

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