The Commonwealth of Massachusetts worked with Bank of America to develop these additional homeownership retention strategies that help ensure sustainable solutions and is the most recent state to join the NHRP. There are now 44 states and the District of Columbia participating in the NHRP mortgage modification program and related foreclosure relief payment and relocation assistance programs.
Bank of America developed and launched the NHRP in 2008, in cooperation with state attorneys general, to provide assistance to Countrywide borrowers who financed their home with certain subprime and Pay-Option adjustable rate mortgages (ARMs). Bank of America removed these from the Countrywide product line upon acquiring Countrywide in July 2008.
These new components of the agreement apply to certain NHRP-eligible loans that also meet the basic qualifications for the government's Home Affordable Modification Program. They include:
- A first look at principal reductions in calculating an affordable payment through an earned principal forgiveness approach to severely underwater loans.
- Principal forgiveness through a reduction of negative-amortization on certain Pay-Option ARMs.
- Conversion of certain Pay-Option ARMs to fully amortizing loans prior to a recast.
- Addition of certain prime two-year hybrid ARMs as eligible for the NHRP mortgage modification programs.
- Inclusion of Countrywide mortgages originated on or before January 1, 2009, as eligible for modifications under the terms of the NHRP.
- A six-month extension of the term of the NHRP program to December 31, 2012.
"The centerpiece of these enhancements is a program of earned principal forgiveness that addresses severely underwater mortgages with some of the highest rates of delinquency – specifically subprime loans, Pay-Option ARMs and prime two-year hybrid ARMs that are 60 days or more delinquent with a principal balance of 120 percent or more," said Barbara Desoer, president of Bank of America Home Loans.
"At the same time earned principal forgiveness helps homeowners, it also recognizes and addresses the interests of mortgage investors by ensuring that forgiveness is tied to the homeowner's performance, reducing the probability of a future default under the modified terms, and adjusting the total amount to be forgiven in light of any gains in property values that might occur in an economic recovery."
Bank of America expects to be operationally ready to implement the new principal reduction components of NHRP in May. The bank will identify mortgages that may be eligible for these solutions and proactively contact those customers to ascertain their interest in a modification and to request documents necessary to determine actual eligibility.
First Look at Principal Reductions
With implementation of these enhancements, Bank of America will make principal reduction the initial consideration toward reaching the HAMP's target for an affordable payment equal to 31 percent of household income when modifying qualifying subprime, Pay-Option ARM and prime two-year hybrid ARM loans that are also eligible for NHRP. An interest rate reduction and other steps would then be considered, if additional savings are necessary to reach the targeted payment.
"In our experience with Home Affordable Modification Program and National Homeownership Retention Program modifications, 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," Desoer said. "We believe that by first addressing the significant underwater condition of some NHRP-eligible loans, the rates of customer acceptance of HAMP trial modifications and conversions to permanent modifications on those loans will be improved, and the homeowners will be more motivated to make payments, yielding more sustainable modifications."
Earned Principal Forgiveness
Bank of America is taking an innovative "earned principal forgiveness" approach to HAMP modifications of the NHRP-qualifying mortgages that are at least 60 days delinquent with current loan-to-value (LTV) ratios of 120 percent or higher.
- An interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years resulting in a maximum 30 percent decrease in the loan principal balance to as low as 100 percent LTV.
- In each of the first five years, up to 20 percent of the forborne amount will be forgiven annually for borrowers that remain in good standing on their mortgage payments.
- Forgiveness installments for the first three years are set at the 20 percent level.
- In the fourth and fifth years, the amount of forgiveness will be dependent upon the updated value of the property, so that the LTV will not be reduced below 100 percent through principal forgiveness.
This solution will be considered when it provides a more positive outcome under the net present value test than under the standard HAMP guidelines.
Innovative Solutions for Customers with Pay-Option ARMs
Bank of America has begun offering two other affordable and sustainable payment solutions on certain Pay-Option ARMs.
- If the principal balance on the loan has grown because the borrower selected an option to make payments that did not cover the interest due and this payment difference was added to principal – known as negative amortization – the bank will consider offering a HAMP modification eliminating the negative amortization feature and forgiving all or part of the negative amortization amount to reduce principal to as low as 95 percent LTV.
- If a pending recast of a Pay-Option ARM will increase the customer's monthly payments, a preemptive modification that eliminates the negative amortization feature of the mortgage and converts it to a fully amortizing market rate loan may be offered.
Impact of Mortgage Modification Efforts
The bank estimates that it will be able to offer these enhanced principal reduction solutions to about 45,000 customers who qualify for a HAMP modification, for an estimated $3 billion in total reduced principal offered under this NHRP enhancement.
From implementation of the NHRP in December 2008 through December 2009, Bank of America offered an NHRP modification or started an NHRP-eligible trial modification under the HAMP for more than 175,000 homeowners, providing potential aggregate savings of more than $7.2 billion over the full terms of the loans. The original program is ahead of schedule and certain to exceed original expectations of offering up to $8.4 billion in savings.
Through its overall homeownership retention efforts since January 2008, Bank of America has helped more than 760,000 customers with a completed loan modification or HAMP trial modification. That includes more than 500,000 completed modifications through proprietary programs; plus nearly 21,000 completed mortgage modifications and more than 240,000 active trial modifications through the federal government's HAMP program through February.
While Bank of America will reach out proactively to homeowners identified as potentially eligible for these enhancements to the NHRP program, customers with questions about their loans and the new programs may log on to www.bankofamerica.com/homeloanhelp for further information.