Bank of America To Forgive Principal For Some Underwater Loans

Michael Santo's picture

It's something the government, and more, have been asking mortgage lenders to make modifications to loans, even to the point of reducing principal. On Wednesday, Bank of America announced it would take that step, giving an "earned principal forgiveness" for some at-risk mortgages.

Bank of America is targeting as much as 30 percent "forgiveness" for these mortgages, for homeowners nationwide who owe more than 120 percent of the value of their home. Bank of America said it would offer about $3 billion in loan forgiveness to about 45,000 troubled homeowners. However, BofA has millions of bad mortgages, and the plan is obviously very targeted, as it addressed only 45,000 of them.

Due to the sharp drop in home values exacerbated by the subprime lending crisis and the recession, many homeowners find themselves underwater, and thus unable to refinance. At the same time, they are unable to make the payments on their current loans.

This plan is among the first by a U.S. mortgage lender that systematically takes steps to reduce mortgage principal, preventing foreclosure in the cases in which home values have dropped well underwater.

The forgiveness would be offered in two stages for the riskiest loans, and would include subprime loans and adjustable rate mortgages. Fixed rate mortgages are ineligible. It is through subprime and adjustable rate mortgages that many have found themselves underwater, though.

Bank of America will first offer an interest-free forbearance of principal. Assuming that the homeowner can stay current on their payments, this can be turned into forgiven principal annually over five years. By doing so, a homeowner can bring the mortgage back down to 100 percent of the home's value over five years.

This precedes the more popular, at least to this time, interest-rate reduction tactic. That would be a secondary option. The plan is scheduled to go into effect in May.

In a press release announcing the plan, Barbara Desoer, president of Bank of America Home Loans, said:

"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."

Written by Michael Santo

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