Delinquent Borrowers May Qualify for Principal Reductions
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- Kirk Haverkamp | June 03, 2010
Bank of America is offering to reduce the principal on certain mortgages where the borrower owes more than the home is worth as part of a program to help homeowners avoid foreclosure, the lender announced today.
The bank said it has begun contacting borrowers with certain types of loans to determine their eligibility for the program, beginning with those who are at least 120 days delinquent on their loans.
The initiative, the National Homeownership Retention Program (NHRP), is being conducted as part of the company’s efforts under the federal Home Affordable Modification Program (HAMP). Qualifying borrowers will see their mortgage principal reduced as the first step toward reducing their monthly mortgage payment toward the HAMP target of 31 percent of household income.
“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.”
Most HAMP loan modifications focus on reducing the interest rate or extending the loan term in order to reduce monthly mortgage payments. The Bank of America initiative is one of the first to emphasize principal reductions, which many analysts say offer at-risk homeowners the best long-term chance of avoiding foreclosure.
To qualify, borrowers must have subprime, pay-option ARM or prime two-year hybrid ARM loans originated by Countrywide Financial prior to Jan. 2, 2009. The balance owed on the mortgage must exceed the property value by at least 20 percent and the loan must be at least 60 days past due.
Bank of America acquired Countrywide Financial in July 2008 after the latter experienced severe financial difficulties in the subprime mortgage crisis.
Qualifying borrowers must also qualify for participation in HAMP, as the Bank of America program is designed for mortgage loan modifications preformed under that program.
The bank is contacting customers who meet initial program requirements, rather than having customers initiate contact. Customers contacted will be asked to submit financial information to determine their eligibility, with the first approvals expected to be mailed to customers in late June.
Under HAMP, borrowers must successfully complete a three-month trial loan modification at a reduced monthly payment before being approved for permanent modifications. Those receiving principal reductions under NHRP must stay current on their mortgages for five years in order to have the reduced principal fully forgiven.
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