According to an earlier report by Reuters, Bank of America is expected to announce a plan today that will forgive a portion of a borrower’s principal balance on their mortgage loan if they owe more than 120% of their home’s value. Additionally, the plan will include principal forgiveness on loans with negative amortization.
As outlined by Reuters, the program will commence in May. The program entails Bank of America offering borrowers who remain current with their monthly mortgage payments a five-year, interest-free forbearance period. The intention of the five-year, interest-free forbearance period is to provide a strategic timeline in which homeowners have an opportunity to reduce the loan-to-value (LTV) of their home back to 100%.
While the federal government’s efforts have largely been concentrated on keeping mortgage rates artificially low, Bank of America’s plan to reduce a homeowner’s principal balance is one of the first of its kind by an independent lender. Many homeowners are so deeply underwater that they are simply walking away from their mortgage obligations. By taking the initiative, Bank of America hopes to prevent the foreclosure crisis from intensifying. Regardless, many mortgage analysts are predicting the foreclosure dilemma will indeed amplify as we progress deeper into 2010, much to the chagrin of the federal government who has made little effort to thwart declining home values.
During the housing economy’s heyday when obtaining a mortgage loan was nearly as easy as ordering a pizza, borrowers were lured into accepting mortgage loans with negative amortization. Negative amortization is the gradual increase in the principal balance when the monthly mortgage payment is not enough to cover the principal balance and interest due. This feature resulted in continually increasing principal balances, leaving homeowners deeper and deeper underwater. On loans with a negative amortization feature, Bank of America intends to reduce the principal balance to as low as 95% of a home’s value. Presumably scheduled to begin in May, Bank of America must first identify the borrowers who may be eligible for the program.
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