Principal Forgiveness: The New BofA Mortgage Deal

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Starting next month (May 2010) or as soon as its operationally ready, Bank of America may reduce principal balances on certain mortgages of deeply underwater loans. This move expands the scope of its National Homeownership Retention Program (NHRP), which was established to make amends for predatory lending practices by Countrywide Financial, which Bank of America acquired in 2008.

The overview of the original program on Bank of America’s website is skimpy on details. A more detailed description of the new-and-improved NHRP indicates that eligible borrowers consist of those who:

• Purchased a primary residence by taking out a subprime mortgage, Pay Option ARM (Adjustable Rate Mortgage), or Prime 2-year Hybrid ARM loan from Countrywide on or before January 1, 2009;
   
• Are now 60 days or more delinquent on the mortgage loan;
   
• Have a principal balance that is 120% or more of the market value of the home (LTV).

Loans are to be modified through 1) principal forgiveness and 2) interest rate reductions. The hoped-for result is a monthly mortgage payment that is affordable according HAMP guidelines AND a fully amortizing loan so that borrowers can avoid the scenario of making payments for decades but never shrinking loan balances.

In some cases, the principal reduction isn’t really about lowering the original loan balance to reflect market value but rather undoing the harm caused by interest capitalization associated with negatively amortizing loans. (In plainer language, if you owe more now than you borrowed a few years ago — because interest was added to your loan balance — then help might be on its way.)

But forgiveness isn't quick, simple, and all-encompassing. The following conditions may apply:

• Principal reductions will be based on borrower performance over a period of 5 years
   
• Loan term will be extended to 40 years (rather than a standard 30 years)
   
• Arrearage (past obligations not paid) will be capitalized (added to the outstanding loan balance)
   
• Principal amounts not forgiven (because there are limits to forgiveness, up to 100% LTV) will be “non-interest bearing and a balloon payment of the forbearance amount will be due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance.” (according to the Final Judgment by Consent   PDF indicating the settlement of a complaint filed by the Attorney General's Office of Massachusetts).

The program (both the original and enhanced NHRP) is part of a settlement of lawsuits filed by Attorney Generals of multiple states, such as:

• Alaska settlement (PDF)
   
• California news release
   
• Louisiana basic info
   
• Massachusetts press release on settlement
   
• Rhode Island press release
   
• Washington website on Countrywide loans

Check the website of your state's Attorney General's office for details on loan programs that may relate to your situation. To see if you are eligible for National Homeownership Retention Program, check Bank of America's website.

Note that “Countrywide has initiated proactive outreach to eligible borrowers," which seems to mean "we’ll call you, don’t call us.” However, the legal agreements require assistance to a certain number of borrowers so Bank of America needs to find people to help. Borrowers can take action rather than waiting for a phone call.