Bank of America says it will look first 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).
The NHRP was launched in 2008 to provide assistance to Countrywide borrowers who financed their home with certain subprime and pay-option adjustable rate mortgages (ARMs). Bank of America removed these from the Countrywide product line upon acquiring Countrywide in July 2008.
Several enhancements are being made to the program, including the introduction of an earned principal forgiveness approach to modifying mortgages that are severely underwater.
These new components of the agreement, which apply to certain NHRP-eligible loans that also meet the basic qualifications for the government's Home Affordable Modification Program (HAMP), include the following:
- A first look at principal reductions in calculating an affordable payment through an earned principal forgiveness approach to severely underwater loans;
- Principal forgiveness through a reduction of negative amortization on certain pay-option ARMs;
- Conversion of certain pay-option ARMs to fully amortizing loans prior to 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 Jan. 1, 2009, as eligible for modifications under the terms of the NHRP; and
- A six-month extension of the term of the NHRP program to Dec. 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 percent or more,’ says Barbara Desoer, president of Bank of America Home Loans.
Bank of America expects to be operationally ready to implement the new principal-reduction components of NHRP in May. The bank additionally estimates that it will be able to offer the principal-reduction solutions to about 45,000 borrowers who qualify for a HAMP modification, for a potential total of $3 billion in reduced principal.
"While, at this time, these enhancements are limited in scopeâ�¦we do believe the concepts provide a foundation for broader use by other national programs," Desoer says.
Severely underwater borrowers are reluctant to accept a loan modification offer that does not include a reduction in principal, Bank of America says. Thirty percent of its underwater and delinquent customers who did not respond to modification offers lacking a principal-reduction component did respond to proprietary Bank of America offers that included a 25% principal reduction to a minimum loan-to-value (LTV) ratio of 110%, Desoer adds.
With implementation of these enhancements, Bank of America will make principal reduction the initial consideration toward reaching 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.
The earned principal forgiveness approach to HAMP modifications of the NHRP-qualifying mortgages includes an interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years, resulting in a maximum 30% decrease 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 amount of forgiveness will be dependent upon the updated value of the property, so that the LTV will not be reduced below 100% through principal forgiveness.
"Of course, we would like for the customer to be less than 100 percent LTV, because we all hope we'll have a nice housing recovery that will accomplish that," says Jack Schakett, credit loss mitigation strategies executive with the bank's mortgage unit." But we don't think the investor should forgive additional principal once they've achieved 100 percent LTV."
This solution will be considered when it provides a more positive outcome under the net present value test than under the standard HAMP guidelines. Bank of America believes the principal reductions will provide a better return for investors 85% of the time, Schakett says.
Bank of America has begun offering two other 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 the principal – known as negative amortization – the bank will consider offering a HAMP modification eliminating the negative amortization feature and forgiving all or part of the negative-amortization amount to reduce 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 eliminates the negative-amortization feature of the mortgage and converts it to a fully amortizing market-rate loan may be offered, the bank says.
SOURCE: Bank of America