BofA To Start Reducing Mortgage Principal

Bank of America announced Wednesday it will look first at principal forgiveness when modifying certain subprime, Pay-Option and prime two-year hybrid mortgages qualifying for its National Homeownership Retention Program.

March 25, 2010

Bank of America announced Wednesday it will look first at principal forgiveness when modifying certain subprime, Pay-Option and prime two-year hybrid mortgages qualifying for its National Homeownership Retention Program.

The bank said it will forgive up to 30 percent of some customers' total mortgage balances. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth. Several enhancements are being made to the program, including the introduction of an earned principal forgiveness approach to modifying mortgages that are severely underwater. 

The plan is the newest provision of an agreement the Charlotte, N.C.-based bank reached 18 months ago with state attorneys general to settle charges over high-risk loans made by Countrywide Financial Corp. The loans were made before Bank of America acquired the mortgage lender in mid-2008. The bank has since stopped making those loans.

Although the motivation for Bank of America's announcement was to resolve legal problems, it has the potential of putting pressure on other banks to also forgive principal on loans that are in danger of failing. Bank of America is the nation's largest bank, and it's among the first to take a systematic approach to reducing mortgage principal when home values drop well below the amount owed.

The Treasury Department, which already has a mortgage modification program, is developing similar plans for principal reductions at other mortgage servicers, according to industry officials speaking on condition of anonymity because they were not authorized to discuss the conversations. They said an announcement could come in the next few months.

Bank of America estimates that about 45,000 customers will qualify for its plan. The offer will cut total reduced principal by about $3 billion.

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