BofA unveils principal-reduction program for option ARM borrowers
Bank of America Corp. has begun notifying some of its most troubled mortgage customers that it will reduce the amount they owe by as much as 30% if they make lowered payments on time over a period of years.
The bank's executive in charge of minimizing mortgage losses, Jack Schakett, said during a teleconference Wednesday that BofA has sent the first 10,000 of an expected 45,000 principal-forgiveness offers under a plan it announced in March.
Schakett described the program, involving offers to erase $3 billion in principal owed, as a last-ditch effort to help borrowers who otherwise would not respond to offers to modify their loans.
The loans include only a small portion of the loans for which Bank of America is the bill-collector, and no Fannie Mae, Freddie Mac or FHA backed mortgages.
It does include certain subprime mortgages, prime-quality mortgages that become variable after two years of fixed payments, and pay-option loans, which allowed borrowers to pay so little that their loan balance went up instead of down.
The amount owed must exceed the current property value by at least 20% and the loans must be 60 days or more past due.
The program differs from most previous loan modification strategies because it makes principal reduction the first step in a "waterfall" of payment-reducing measures instead of the last. The idea is to encourage "under water" borrowers by helping them to recover an ownership stake in their homes.
It works like this, Schakett said:
If a delinquent borrower owed $250,000 on a home currently worth $200,000, the bank would stop charging interest on $50,000 of the loan amount. If necessary, the bank would also reduce the interest rate and extend the loan term to reduce the mortgage payments to no more than 31% of the borrower's gross income -- the target set by the government's foreclosure-avoidance program.
For each year that the borrower successfully makes payments, up to three years, some of the $50,000 would be forgiven.
Most borrowers would see the entire amount forgiven after three years under a government-sponsored plan, Schakett said.
About 20% of the most seriously delinquent borrowers would not be eligible for the government-sponsored plan because of objections from investors who own the loans, Schakett said. For those customers, Bank of America would offer a plan of its own enabling them to earn principal forgiveness over a five-year period.
Bank of America inherited the loans in 2008 when it bought struggling Countrywide Financial Corp. of Calabasas. Countrywide, once the nation's largest home lender, had run into trouble by making loans to people with poor credit or who didn't provide proof that they earned enough to repay the loans.
-- E. Scott Reckard