Principal Reduction Program Offered by Bank of America
Principal Reduction Program Offered by Bank of America
This is the first time a major bank has come out in favor of reducing principal and not just adjusting interest rates. The program aims to offer relief to Americans upside down by more than 20%. In many states where sub-prime mortgages were rife, Arizona, California, Florida, homes are underwater by at least half or more. This program offers a reprieve, if it actually will be honored, but will not put homeowners on par with the value of their homes in many cases. The following is another point of view by Kenneth R. Harney.
“For hundreds of thousands of homeowners who are underwater on their mortgages, it’s been a tantalizing question: Is there any way that our lender might agree to lower the amount we owe — not just the monthly payments but the principal debt itself?
Until now, the answer almost always has been a resounding no. Lenders and investors were willing to cut interest rates, reschedule payments, even write off some late fees, but they were dead-set against forgiving even a dollar of the principal balance owed. The Obama administration’s loan-modification programs have carefully sidestepped the subject as well, focusing on lowering troubled borrowers’ monthly payments to more affordable levels rather than actually wiping out debt.
But the outlook for principal reductions may be on the verge of significant change. Bank of America recently unveiled the mortgage industry’s first large-scale principal forgiveness program, potentially involving up to 45,000 underwater borrowers and $3 billion in debt write-offs.
Meanwhile, Treasury Department officials confirmed that the administration is examining debt forgiveness options as potential add-on features to its existing mortgage-modification programs. The program changes could be announced within the next few weeks and, if adopted by the industry, could ultimately affect loan modifications offered by substantial numbers of banks and mortgage companies.
Bank of America’s new program targets borrowers who are deeply underwater — those with loan-to-value [LTV] ratios of 120 percent or more. This means they owe at least 20 percent more on their mortgage balances than the 
current market price of their homes. There is no limit on how far underwater borrowers can be, but the program has a 30 percent maximum reduction of any principal balance.
Barbara Desoer, president of Bank of America Home Loans, said the program attempts to address the problems of the most “severely underwater mortgages with some of the highest rates of delinquency,” and it could “become an industry model for principal reductions” on a far broader scale…..”
