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BofA Will Slash Loan Balance By 30% For Some Underwater Borrowers Starting In May

March 28th, 2010 categories: Foreclosures / Short Sales, Loans / Financing, The Economy

Pull QuoteBank of America just announced a new loan modification program that could help hundreds if not thousands of underwater Solano County homeowner.

This represents the first attempt by a major bank — and they don’t get much bigger than banking giant BofA — to slash an underwater borrower’s principal rather than simply reducing the interest rate for a period of time.

BofA’s newly announced program is slated to start in May and it’s not available for every BofA borrower. According to BofA’s press release announcing its principal reduction plan, it’s mainly for former Countrywide Home Loan borrowers with “certain subprime and Pay-Option adjustable rate mortgages (ARMs).” (Bank of America took over Countrywide in 2008).

Borrowers Must Meet HAMP Guidelines

In order to qualify, you must fall within the guidelines of the government’s Home Affordable Modification Program (HAMP). Additionally, you must be at least 60 days late on your mortgage payments and have a loan that’s at least 20% underwater.

For those with qualifying loans, rather than modifying the interest rate, as it’s done up until now, BofA will instead look first at reducing the loan amount in order to get the payment down to HAMP’s targeted 31 percent of household income. If it’s necessary to reduce the interest rate, too, that will also be considered.

A Forbearance Program With A Twist

Initially, the principal reduction will be set up as an interest-free forbearance plan.

However, unlike a traditional forbearance program, where the principal and deferred interest must be repaid, under BofA’s new program, borrowers who keep their payments current will have up to 20% percent of the forbearance amount permanently forgiven every year over a five year period.

That means the entire forbearance amount (up to 30% of the current loan amount) will be forgiven for those borrowers who stay current all five years.

To illustrate, let’s say your home is worth $200,000 but  your mortgage is $300,000. Under BofA’s new program, your loan balance would be temporarily reduced to $210,000. If you kept your payments current for the next five years, your loan balance reduction would become permanent.

100% Loan-To-Value Requirement

The only caveat with all of this is that the loan amount can never drop below 100% of the home’s then-current value.

So if property values increased and your home was worth $230,000 by year five, then your permanent loan balance reduction wouldn’t go below $230,000.

Whether this will work out as well in real life as it sounds on paper remains to be seen.

We all remember the high expectations that accompanied the government’s HAMP program when it was unveiled last spring, But in the year since, the number of successful modifications have fallen way short of those lofty expectations.

So we’ll have to wait and see whether BofA’s new 30% principal reduction program really makes an impact.

If it’s successful, it could prompt other banks to follow suit, which could ultimately substantially reduce the number of homes that might otherwise head towards foreclosure.

Stay tuned…

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This entry was posted on Sunday, March 28th, 2010 at 10:08 am and is filed under Foreclosures / Short Sales, Loans / Financing, The Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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