save your home
Millions of homeowners who are underwater on their mortgages are looking for a way to convince their lender to lower the amount they owe. Many want to remain in their homes but its simply too tempting to walk away.
Getting a principal reduction has always been an almost impossible task. Lenders were willing to cut interest rates, reschedule payments, even write off some late fees, but they were hard lined against forgiving even a dollar of the principal balance owed. The Obama administration’s loan modification programs have avoided the subject, focusing on lowering homeowners monthly payments instead.
This looks to 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.
The Treasury Department has confirmed that the administration is examining debt forgiveness options as potential add-on features to its existing mortgage modification (HAMP) programs. The 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 20% or more on their mortgage balances than the current market price of their homes. The program has a 30% maximum reduction of any principal balance.
The program targets three mortgage products: subprime loans (payment-option mortgages with negative amortization features) and adjustables that offered teaser interest rates for the first two years, then converted into loans whose rates adjust annually.
As part of its ongoing loan-modification efforts, the bank will look to “earned” or phased-in principal forgiveness as the first step toward keeping an underwater borrower out of foreclosure. Previously the bank, along with the rest of the lending industry, looked first to lowering a homeowner’s interest rate and monthly payments. Under the new program, severely underwater borrowers will be evaluated for principal reduction as the first step in a modification.
If you meet certain eligibility requirements, the new program could reduce your balance and your new payments would be based on the lowered principal debt and possibly a lower note rate. This would be accomplished by the creation of an interest-free forbearance account covering a five-year period. Assuming you made regular payments at the modified, lower amount during the first year, some principal balance would then be forgiven. Finally some relief for homeowners!
The same would be true for the second and third years. During the fourth and fifth years, the bank would appraise your property. If its value had appreciated in either year to the point where your LTV dropped below 100 percent — you were no longer underwater but still benefiting from the lowered payments — there would be no forgiveness for that year. On the other hand, if you remained underwater, you would receive the scheduled reduction again.
Other banks such as Wells Fargo are anticipated to also join in on the program. If the Obama administration moves ahead with principal forgiveness it might become the lifeline the homeowners have been looking for.
