Bank of America will look initially at principal forgiveness — ahead of an interest rate reduction — when modifying certain subprime, pay-option and prime two-year hybrid mortgages qualifying for its National Homeownership Retention Program (NHRP).
Additionally, BofA announced that several enhancements are being made to the program, such as the introduction of an earned principal forgiveness approach to modifying mortgages that are severely underwater.
The program changes are aimed to encourage greater customer participation in the firm's aggressive homeownership retention programs, including the government's Home Affordable Modification Program (HAMP).
The Commonwealth of Massachusetts worked with BofA to develop these added homeownership retention strategies that help ensure sustainable solutions and is the most recent state to join the NHRP. There are now 44 states and the District of Columbia participating in the NHRP mortgage modification program and related foreclosure relief payment and relocation assistance programs.
BofA developed and launched the NHRP in 2008, with the help of state attorneys general, to offer assistance to Countrywide borrowers who financed their home with certain subprime and pay-option ARMs. Bank of America removed these from the Countrywide product line upon buying Countrywide in July 2008.
The agreement's new components apply to certain NHRP-eligible loans that also meet the basic qualifications for the government's HAMP. They include:
* A first look at principal reductions in calculating an affordable payment through an earned principal forgiveness approach to severely underwater loans.
* Principal forgiveness via a reduction of negative-amortization on certain pay-option ARMs.
* Conversion of certain pay-option ARMs to fully amortizing loans before a recast.
* Addition of certain prime two-year hybrid ARMs as eligible for the NHRP mortgage modification programs.
* Inclusion of Countrywide mortgages originated on or before January 1, 2009 as eligible for modifications under the terms of the NHRP.
* A six-month extension of the term of the NHRP program to December 31, 2012.
"The centerpiece of these enhancements is a program of earned principal forgiveness that addresses severely underwater mortgages with some of the highest rates of delinquency — specifically subprime loans, pay-option ARMs and prime two-year hybrid ARMs that are 60 days or more delinquent with a principal balance of 120% or more," said Barbara Desoer, president of Bank of America Home Loans. "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."
BofA anticipates to be operationally ready to implement NHRP's new principal reduction components in May. The bank will identify mortgages that might be eligible for these solutions and proactively contact those customers to ascertain their interest in a modification and to request documents necessary to determine actual eligibility.
First Look at Principal Reductions
With implementation of these enhancements, BofA will make principal reduction the first consideration in reaching the HAMP's target for an affordable payment equal to 31% of household income when modifying qualifying subprime, pay-option ARM and prime two-year hybrid ARM loans that are also eligible for NHRP. An interest rate reduction and other steps would
then be considered, if additional savings are necessary to reach the targeted payment.
"In our experience with [HAMP] and [NHRP] modifications, [BofA] 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 said. "We believe that by first addressing the significant underwater condition of some NHRP-eligible loans, the rates of customer acceptance of HAMP trial modifications and conversions to permanent modifications on those loans will be improved, and the homeowners will be more motivated to makepayments, yielding more sustainable modifications."
Earned Principal Forgiveness
BofA is taking an "earned principal forgiveness" approach to HAMP modifications of the NHRP-qualifying mortgages that are at least 60 days delinquent with current LTV ratios of 120% or higher.
* An interest-free forbearance of principal that the homeowner can turn into forgiven principal more than five years resulting in a maximum 30% dip in the loan principal balance to as low as 100% LTV.
* In each of the first five years, up to 20% of the forborne amount will be forgiven annually for borrowers that remain in good standing on their mortgage payments.
* Forgiveness installments for the first three years are set at the 20% level.
* In the fourth and fifth years, the forgiveness amount will be reliant on the property's updated value , so that the LTV will not be reduced below 100% through principal forgiveness.
This solution will be considered when it provides a more positive outcome under the net present value test than under the standard HAMP guidelines.
Solutions for Clients with Pay-Option ARMs
BofA has started offering two other affordable and sustainable payment solutions on certain pay-option ARMs.
* If the principal balance on the loan has grown because the borrower selected an option to make payments that did not cover the interest due and this payment difference was added to principal — or negative amortization — the bank will consider offering a HAMP modification removing the negative amortization feature and forgiving all or part of the negative amortization amount to limit the principal to as low as 95% LTV.
* If a pending recast of a pay-option ARM will increase the customer's monthly payments, a preemptive modification that removes the negative amortization feature of the mortgage and converts it to a fully amortizing market rate loan may be offered.
Impact of Mortgage Modification Efforts
The bank projected that it will be able to offer these enhanced principal reduction solutions to around 45,000 customers who qualify for a HAMP modification, for approximately $3 billion in total reduced principal offered under this NHRP enhancement.
From implementation of the NHRP in December 2008 through December 2009, BofA offered an NHRP modification or started an NHRP-eligible trial modification under the HAMP for over 175,000 homeowners, providing potential aggregate savings of more than $7.2 billion over the full terms of the loans. The original program is ahead of schedule and certain to go over original expectations of offering up to $8.4 billion in savings.
Via its overall homeownership retention efforts since January 2008, BofA has helped over 760,000 borrowers with a completed loan modification or HAMP trial modification. That includes over 500,000 completed modifications via proprietary programs; close to 21,000 completed mortgage modifications; and over 240,000 active trial modifications via the HAMP through February.