BOFA to offer help to troubled homeowners

It will embark on plans to reduce home owners’ mortgage principal

Bank of America yesterday announced plans to start forgiving mortgage loan principal for troubled homeowners who owe more than 120 per cent of their home’s value or are battling ever-expanding ‘negative amortisation’ loans.

According to a summary of the programme obtained by Reuters, Bank of America pledged to offer an ‘earned principal forgiveness’ of up to 30 per cent in two stages. The lender will first offer an interest-free forbearance of principal that the homeowner can turn into forgiven principal annually over five years, provided they stay current on their payments.

The forgiveness can allow a homeowner to bring the loan value back down to 100 per cent of the home’s value over five years, according to the plan, confirmed by sources close to the matter.

The plan, to begin in May, is among the first by a US mortgage lender that takes a systematic approach to reducing mortgage principal to tackle the thorny issue of preventing foreclosures when home values drop well below the amount owed.

A Bank of America spokesman declined comment.

Announcement of the programme in Washington comes as US. lawmakers and housing advocates are becoming increasingly vocal about the need for principal writedowns in order to save homes on a large scale. Amid stubbornly high unemployment, homeowners are seen as more likely to simply abandon an unaffordable mortgage when they have no equity or are deep ‘underwater’ on the loan.

The US Treasury’s mortgage modification programme has largely relied on reducing interest rates, and has been criticised for failing to address a steep and painful reduction in home values.

The announcement also will come two days after two Washington state residents sued Bank of America for allegedly reneging on a promise it made to modify troubled mortgages when it took US$25 billion in taxpayer bailout money.

The lawsuit alleged that the lender has ’seriously strung out, delayed and otherwised hindered’ modifications because it had financial incentives to do so.

Under the plan, Bank of America also will slash the principal balance on the worst of the high-risk mortgages written during the height of the housing boom, the so-called’payment option’ adjustable rate mortgages that had a negative amortisation feature that allowed the principal balance to grow.

On such loans that are delinquent and in danger of imminent default, the lender will announce that it will cut principal to as low as a 95 per cent of the property’s value.

Bank of America lender also will expand its modification programme to consider payment reductions on prime hybrid adjustable rate mortgages that have floating interest rates after two years and will extend its National Homeowner Retention Plan by six months until the end of 2012.

The bank expects to be operationally ready to start the earned principal reduction plan in May. It plans to identify mortgages that may be eligible for these programs and proactively contact homeowners to request documents to verify eligibility.