Bank of America Loan Forgiveness Could Shrink Mortgages for Thousands

Austin, TX – U.S. Housing News — Bank of America has announced a loan forgiveness program that could shrink the mortgages of 45,000 homeowners.

The goal of the program is to motivate struggling homeowners to stay in their homes, avoiding the foreclosure process entirely. By forgiving a portion of the principal amount owed, the Bank of America program would also make it financially easier for homeowners to stay afloat.

How Principal Forgiveness Works

Up until now, most of the loan modification programs used by banks have focused on the interest rate and term of the loan. But the banks were reluctant to reduce the actual amount borrowed (the principal). That is what this new program is designed to do — it forgives part of the loan principal to help struggling homeowners avoid foreclosure. Bank of America said that it is willing to forgive up to 30% of the principal for qualifying borrowers.

In a press release issued on Wednesday, BOA president Barbara Desoer cited the lack of motivation among homeowners with underwater mortgage loans. She said the company “has found that many homeowners who owe considerably more on their mortgages than their homes are worth [i.e., underwater] are reluctant to accept a solution … without an accompanying reduction in the balance due on the loan.”

Desoer’s comments allude to the fact that many underwater homeowners choose to walk away from their mortgages, choosing foreclosure as their only palatable option. The loan forgiveness program gives these people some added incentive to stay in the home, and to keep making payments. Thus, it’s a favorable option for bank and borrower alike.

Who is Eligible for the Program?

According to information released by BOA, the loan forgiveness program focuses on people who used subprime mortgages and option ARMs through Countrywide Home Loans. If you recall, Bank of America acquired Countrywide back in 2008. BOA estimates that they may be reducing principal for up to 45,000 customers who meet these criteria, and that it could eventually forgive more than $3 billion worth of debt.

Additionally, the mortgage must be at least 60 days delinquent with a loan-to-value (LTV) ratio of 120 percent or higher. In other words, the amount owed on the loan must be at least 120 percent of the home’s current value. So it would seem that a property appraisal would be required, in order to determine the home’s current value (though there is no mention of this in the Bank of America news release).

We suspect that other lenders are watching this program closely, and that they may offer a similar option for their customers in the future. But as of right now, only Bank of America has a loan forgiveness program that deals with the principal amount owed.