The last thing that mortgage companies want to do is forgive their customers' debts. Bank of America will make an exception for a few borrowers.
Around 45,000 homeowners will be offered reductions in mortgage debt as part of the bank's foreclosure-avoidance effort. If all of them accept the offer, and if all of those customers faithfully make their reduced monthly payments for the next five years, the amount forgiven could total $3 billion.
Before you get your hopes up, keep this in mind: These 45,000 borrowers are a small subset of the bank's customers. Principal forgiveness will be offered only to people who got certain kinds of loans from Countrywide Home Loans. Bank of America bought Countrywide in 2008.
When Bank of America bought Countrywide, it took possession of $25 billion in pay-option adjustable-rate mortgages. That's how much the customers owed on pay-option ARMs; their total value as an investment was $13.9 billion last September, because Bank of America knew that billions of dollars' worth of these loans would go belly-up eventually.
Countrywide did a lot of subprime loans, too. Bank of America stayed away from subprime. But when BofA bought Countrywide, it ended up with $1.8 billion in Countrywide's subprime ARMs on the books. The borrowers who got those loans may be eligible for principal forgiveness, too, along with a few people who got prime, two-year ARMs from Countrywide.
Bottom line: Principal forgiveness may be offered to 45,000 customers who got pay-option and subprime ARMs from Countrywide. If your loan officer sported a Bank of America ID badge, you won't be offered principal forgiveness, because you didn't get your mortgage from Countrywide.
What is a pay-option ARM?Pay-option ARMs are adjustable-rate mortgages in which the borrower chooses the payment. The borrower usually has four options. One option is to pay less than the interest accumulated that month. In other words, the borrower might rack up $1,200 in interest in a given month, but have the option of paying $1,000. The $200 difference was added to principal. After making the minimum payment, the borrower owed more on the house. When borrowers end up owing more after making a payment, it's called negative amortization. According to an SEC filing, 72 percent of pay-option customers made negative-amortization payments in June 2008. From July through September last year, half did.
"In our experience, we have found that severely underwater homeowners are reluctant to accept a solution that does not offer some reduction in principal," says Barbara Desoer, president of Bank of America Home Loans.