BofA to Reduce Principal in HAMP Mortgage Modifications

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Bank of America Corp. said Wednesday that it would offer to erase $3 billion in principal over a five-year period for homeowners with certain adjustable-rate mortgages written by Countrywide Financial Corp., the aggressive Calabasas mortgage giant that BofA acquired in 2008 as the home-lending industry imploded.

The program, resulting from a settlement of a lawsuit filed by the Massachusetts attorney general, involves a relatively small number of borrowers who are 60 days or more late in paying their loans and owe more than their home’s current value, said Barbara Desoer, the head of BofA’s home loan and insurance division.

Desoer said she hoped that it would serve as a model for additional principal-reduction programs aimed at underwater borrowers who want to stay in their home.

Most of the borrowers have pay-option, adjustable-rate mortgages, or option ARMs, a type of loan that allowed them to pay so little that their mortgage balances went up instead of down. To help reduce their first-mortgage payments, the bank is offering to stop charging interest on part of the principal the borrowers owe, a practice known as forbearance.

The other features of the government plan — reducing the interest rate to as low as 2% and extending the time for payback to as much as 40 years — would then be applied to try to get the payment down to 31% of household income, the target of the Obama administration’s anti-foreclosure plan.

Borrowers who agreed to the restructured terms and who made the lower payments as scheduled would be able to gradually convert the principal placed into forbearance into forgiven principal over a five-year period.

For example, a borrower owing $250,000 might be required to make payments on only $200,000 if that is what the home is currently worth, said Jack Schakett, credit loss mitigation strategies executive at Bank of America Home Loans. A borrower who stayed current on the modified loan would have 20% of the set-aside $50,000, or $10,000 of their debt, erased each year.

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