In its ongoing campaign to stem foreclosures, Bank of America Corp. is becoming more aggressive with principal balance reductions on loan modifications.
The Charlotte, N.C.-based company said in a news release today that it will consider forgiving principal on loan modifications for some of its loans before cutting the interest rate.
The expanded program, modeled after one negotiated with the Commonwealth of Massachusetts for borrowers in that state, is designed to increase the acceptance rate of modification offers while protecting investors.
Eligible borrowers include those who are qualified under the Home Affordable Modification Program, at least 60 days delinquent and in a “severe” negative-equity position. The program is targeted at subprime mortgages, pay-option loans and certain two-year hybrid adjustable-rate mortgages originated by Countrywide Home Loans.
In a phone call with reporters, Bank of America Home Loans President Barbara Desoer noted that those programs were all discontinued when BoA acquired Countrywide in 2008.
The loan-to-value would need to be above 120 percent.
“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 explained in the statement.
The enhancements include an interest-free forbearance of the principal that can be forgiven over a five-year period at 20 percent a year. The maximum amount forgiven will be 30 percent, and that would require that the LTV doesn’t fall below 100 percent. Forgiveness requires timely repayments.
One BoA spokesman noted in the call that the LTV will only be reduced until the debt ratio falls to 31 percent, adding that “if we have to stop at 105, if that’s the level, to actually achieve the 31 percent affordability, then we will stop at 105.”
The statement indicated, however, that forgiveness during the fourth and fifth years will depend on the property value at that time, and in no case will it bring the LTV below 100 percent. Appreciation could eliminate forgiveness in years four and five.
The plan also calls for forgiveness of accrued negative amortization and a reduction in principal down to 95 percent LTV on HAMP modifications.
BoA said it would “ignore the existence of any second liens” on the held-for-investment portfolio loans. But on third-party loans, no principal reduction will be done if a second mortgage is outstanding.
The enhancements are expected to be in place by May. Eligible borrowers will be contacted by the bank. The expanded options are expected to be offered on around 45,000 loans — reducing principal by an estimated $3 billion.
Desoer said that the company has started or completed 760,000 trial and permanent modifications since acquiring Countywide Financial Corp. Around 500,000 of the modifications were done using BoA’s proprietary modification program, while approximately 240,000 HAMP modifications have been started and more than 27,000 permanent HAMP modifications have been completed.
