Bank of America has begun implementation of an earned principal forgiveness approach to modifying certain loans eligible for its National Homeownership Retention Program (NHRP). The plan is being offered to homeowners who owe considerably more on their loan than the current value of their home, when the loan is being considered for modification through the government’s Home Affordable Modification Program (HAMP).
Among several enhancements to the NHRP announced in late March, the bank unveiled their approach to employing a principal reduction as the first step toward reaching HAMP’s affordable payment target of 31 percent of household income when modifying certain NHRP-eligible mortgages--ahead of lowering the interest rate and extending the term. The reduced principal balance will be a non-interest bearing forbearance amount, and the homeowner may earn forgiveness of the forborne amount by remaining in good standing on payments.
The NHRP enhancement was implemented on schedule in mid-May with the mailing of the first letters notifying customers who may qualify for the new program. Customers are required to submit required documentation of financial information for consideration in determining eligibility and underwriting the modification plan. Upon completion of these review processes, the first trial modification offers under the earned principal forgiveness program may be ready for mailing in the second half of June.
NHRP-eligible loans include sub-prime, pay-option ARM and prime-quality two-year hybrid ARM loans originated by Countrywide on or prior to Jan. 1, 2009, if the amount of principal owed exceeds the current property value by at least 20 percent and the loan is 60 days or more past due.
The U.S. Department of the Treasury has announced a similar earned principal forgiveness concept for HAMP that will be effective later this year and may be considered for a broader range of loans.
“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, increasing the rates of acceptance of HAMP trial modification offers, conversion to permanent modifications and long-term success of the homeowner,” said Jack Schakett, credit loss mitigation executive for Bank of America Home Loans.
In the first round of outreach, letters outlining the program and requesting financial information are being sent to certain NHRP-eligible homeowners who are more than 120 days overdue on payments.
“We met our goal to begin offering this program in mid-May, providing opportunities for customers who are in the most imminent danger of foreclosure to begin trial modifications by the end of June,” said Schakett. “At the same time, we are aligning the NHRP enhancement with some guidelines we expect to be included in the government’s program when it is rolled out in the coming months.”
As part of the alignment, Bank of America may offer earned principal forgiveness over a five-year period, as it announced in March, or over the three-year timeframe that Treasury intends to include in its HAMP principal forgiveness design, depending on individual borrower situations.
Since the initial outreach to customers under the NHRP in December 2008 through March of this year, Bank of America has offered an NHRP modification or started an NHRP-eligible trial modification under HAMP for more than 200,000 homeowners. The offers have provided potential aggregate savings of principal and interest totaling $9.1 billion over the full terms of the loans, which exceeds the original three-year estimate of up to $8.4 billion made at the time the program began. More than 100,000 modifications have been completed under the NHRP, and 43,000 more NHRP-eligible homeowners have entered a HAMP trial payment plan. Through all programs, Bank of America has completed more than 600,000 mortgage modifications since January 2008.
Under other provisions of the NHRP, more than $113 million in foreclosure relief payments have been made to former Countrywide customers who went into early default; and $54 million in relocation assistance payments have been made to residents of foreclosed properties, both owners and tenants.
For more information, visit www.bankofamerica.com.