In an effort to encourage greater homeowner participation in modification programs, Bank of America has launched a new approach to modify severely underwater loans.
The bank announced Wednesday that it will first look at principal forgiveness — ahead of an interest rate reduction — when modifying certain, subprime and adjustable-rate mortgages (ARMs) qualifying for its National Homeownership Retention Program (NHRP). These “certain” NHRP-eligible loans must also meet the basic qualifications of the government’s Home Affordable Modification Program (HAMP).
According to Barbara Desoer, president of Bank of America Home Loans, the “earned principal forgiveness” approach 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 percent or more.
“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,” Desoer said.
When modifying these mortgages, Bank of America will make principal reduction the initial consideration toward reaching an affordable payment equal to 31 percent of household income. If additional savings are necessary to reach the targeted payment, an interest rate reduction and other steps will considered.
Under the earned principal forgiveness approach, qualifying homeowners will be offered an interest-free forbearance of principal that they 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 loan-to-value ratio (LTV).
In each of the first five years, up to 30 percent of the forborne amount will be forgiven annually for borrowers
that remain in good standing on their mortgage payments.
For the first three years, forgiveness installments are set at the 20 percent level. And in the fourth and fifth years, the amount of forgiveness will be dependent upon the updated value of the property. This will ensure that the LTV will not be reduced below 100 percent through principal forgiveness.
“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,” Desoer explained.
In addition to its new principal forgiveness approach, Bank of America has begun offering two other affordable and sustainable payment solutions on certain Pay-Option ARMs.
In the case of 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.
The new components of NHRP are expected to be implemented in May. 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, resulting in an estimated $3 billion in total reduced principal.
Principal forgiveness is just one of the tools Bank of America will be using to modify severely underwater mortgages. As DSNews.com previously reported, the bank was the first servicer to sign an agreement to participate in the Home Affordable Second Lien Modification Program, and it also plans to participate in the Home Affordable Foreclosure Alternatives Program.
These efforts are necessary, though. According to the administration’s February HAMP report card released earlier this month, Bank of America is servicing more than 1 million HAMP-eligible mortgages that are 60-plus days delinquent—significantly higher than any other servicer participating in the program.
As of the end of February, the bank had completed 20,666 permanent modifications under HAMP, and it had 22,303 pending permanent modifications. Bank of America also reported 240,550 active trial modifications, which represented just 24 percent of its delinquent loans eligible for modification under HAMP.
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