In late March 2010, Bank of America announced its National Homeownership Retention Program (NHRP) to help distressed homeowners by offering principal reductions on mortgages on underwater (or negative equity) properties. Bank of America leads the industry in this type of relief for homeowners. This program will provide assistance to approximately 45,000 homeowners and will relieve $3 billion dollars in consumer debt. Bank of America hopes that the combination of the government-backed Home Affordable Modification Program (HAMP) and NHRP will encourage more permanent loan modifications and that homeowners will be more motivated to make payments over the remaining term of their mortgage.
Bank of America has been widely criticized for their performance under the Making Home Affordable Program. At the close of February 2010, BOA was reported to be servicing 1.09 million mortgage loans that were 60 or more days delinquent. Common complaints from consumers include inconsistent information provided by customer service, extremely long hold times, and rude and threatening calls from collections agents.
This new program is offered to those homeowners who are deeply underwater on their mortgage – or who have a loan-to-value ratio of over 120 per cent. This means they owe at least 20 per cent more on their mortgage than the current value of the property. While there is no limit on the amount of depreciation on the property, there is a limit on the amount of principal forgiveness of 30 per cent. This program was created to assist consumers who were victims of the mortgage products that were marketed during the real estate boom. These programs include interest-only mortgages, adjustable rate mortgages with “teaser” introductory rates, and mortgages with balloon payments – to name a few.
Bank of America’s proposed program will reward homeowners over a five year period by allowing them to pay reduced monthly payments based on the adjusted value of the property. Each year, if the borrowers are successful in meeting their payment arrangements, an amount will be forgiven from their overall mortgage debt. For example, if a borrower had a $350,000.00 mortgage and their home is now only worth $300,000.00, the principal would be reduced $50,000.00 over the five year period – or $10,000.00 per year. After year three, the bank would perform an appraisal to determine the status of the value of the property.
The Obama Administration included principal forgiveness as an element in its improvements to the Making Home Affordable initiative. The new programs require servicers to consider an alternative modification approach to write down mortgage debt on negative equity properties. For borrowers who have already received a permanent loan modification, or who are still in a trial modification payment arrangement, servicers are required under these HAMP amendments to retroactively consider reducing the principal amount of the mortgage if it exceeds 115 per cent of the value of the property.
Following Bank of America’s lead, Wells Fargo also recently announced that it will consider principal forgiveness as an option for underwater/negative equity mortgage clients. Consumers can find more information about Bank of America’s program at www.bankofamerica.com/homeloanhelp.
