Bank of American will be losing a fortune in this new loan modification effort to reduce foreclosure by reducing principal amounts owed. But, the losses will likely be less than actually foreclosing. I think this is a pretty good idea, it's just sad that such huge sums of money have to be used just to keep people in their homes.
Bank of America has announced it will make principal forgiveness– ahead of an interest rate reduction – the initial consideration toward modifying certain subprime, Pay-Option and prime two-year hybrid mortgages qualifying for its National Homeownership Retention Program (NHRP). An interest rate reduction and other steps would then be considered, if additional savings are necessary to reach the 31 percent debt to income targeted payment.
Under the plan BOA will forgive up to 30 percent of the mortgage loan balance in two stages, but with a quid pro quo from the homeowner. The bank will offer an interest-free forbearance of up to 30 percent of the principal balance for five years. If the homeowner stays current on mortgage payments for the period of time, then the amount will be forgiven. On paper, at least, that forgiveness will allow the homeowner to return his loan to an LTV of 100 percent.
Barbara Desoer, president of Bank of America Home Loans says, "Bank of America has found that many homeowners who owe considerably more on their mortgages than their homes are worth are reluctant to accept a solution that addresses only the amount of the payment without an accompanying reduction in the balance due on the loan."