Bank of America said Wednesday that its new mortgage program for certain underwater borrowers, which incorporates an earned principal forgiveness approach into the loan modification equation, has been implemented on schedule.
The North Carolina-based bank has already mailed out an initial round of letters notifying customers who may qualify. Upon review of these applications, the first trial offers for BofA's principal forgiveness program could find their way to distressed borrowers as early as the second half of June.
""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,"" said Jack Schakett, credit loss mitigation executive for Bank of America Home Loans. ""Encouraging more borrowers in this situation to accept a homeownership retention solution may help stabilize the surrounding community to the benefit of neighboring homeowners.""
Bank of America says the principal reduction plan, which was originally announced in late March, is being offered to homeowners who owe ""considerably more"" on their loan than the current value of their home, when the loan is being considered for restructuring through the government's Home Affordable Modification Program (HAMP).
For qualifying borrowers, the bank will employ a principal reduction as the first step toward reaching HAMP's affordable payment target of 31 percent of household
income, ahead of lowering the interest rate and extending the term. The reduced principal balance will be a non-interest bearing forbearance amount, and the homeowner may earn forgiveness of the forborne amount by remaining in good standing on payments.
Loans eligible for principal forgiveness include subprime, Pay-Option adjustable-rate mortgages (ARMs), and prime-quality two-year hybrid ARM loans originated by Countrywide before January 1, 2009. The amount of principal owed must exceed the current property value by at least 20 percent and the loan must be at least 60 days past due.
In the first round of outreach, letters outlining the program and requesting financial information are being sent to eligible homeowners who are more than 120 days overdue on payments. So far, BofA has notified some 10,000 borrowers of the program, according to the _Boston Globe_.
Soon after Bank of America unveiled its plans for earned principal forgiveness modifications, the Treasury Department announced a similar principal reduction concept as an enhancement to HAMP. That piece of the federal program will become effective later this year and may be considered for a broader range of loans.
""We met our goal to begin offering this program in mid-May, providing opportunities for customers who are in the most imminent danger of foreclosure to begin trial modifications by the end of June,"" Schakett said. ""At the same time, we are aligning the [principal forgiveness] enhancement with some guidelines we expect to be included in the government's program when it is rolled out in the coming months.""
As part of the alignment, Bank of America says it may offer earned principal forgiveness over a five-year period, as it announced in March, or over the three-year timeframe that Treasury intends to include in its HAMP design, depending on individual borrower situations.
As part of its homeownership retention program, Bank of America has also made more than $113 million in foreclosure relief payments to former Countrywide customers who went into early default, as well as $54 million in relocation assistance payments to residents of foreclosed properties, both owners and tenants.