Bank of America says it will offer principal reductions as the first step of HAMP-style loan modifications to this 45,000-strong subset of Countrywide customers. Pay-option ARM customers will get a different offer from subprime ARM customers.
For pay-option ARM customers, Bank of America will offer to forgive some or all of the debt that was added as negative amortization. If all of the negative-amortization debt is erased, the customer still ends up owing the original mortgage amount.
Forgiving principalIf that's not enough to qualify for a modification under HAMP guidelines, then Bank of America moves to the next stop: "earned principal forgiveness."
Earned principal forgiveness may be offered on subprime ARMs as well as on pay-option ARMs. To qualify, the borrower has to owe at least 20 percent more than the house is worth. For these customers, Bank of America will "forbear principal" for five years. The bank will forbear as much as 30 percent of the loan amount, down to 100 percent of the home's current value.
"Forbear principal" means you still owe the money, but the bank doesn't charge interest on the entire loan amount. For example, if you owe $120,000, and the bank forbears $20,000, then you pay interest on $100,000 -- but you still owe $120,000.
If Bank of America forbears part of the amount you owe, you can have some of that debt forgiven if you stay current on the loan. One-fifth of the forborn amount is forgiven each year if you make your payments on time. That happens for at least the first three years.
In the fourth and fifth years, debt won't be forgiven if the home's value has risen and you're no longer upside-down on the loan. "This helps strike a critical balance between customer and investor interests," says Jack Schakett, who heads Bank of America's loss-mitigation efforts.
The bank's message to borrowers who think they might be eligible for this program: Don't call us, we'll call you. Schakett says that every month, the bank evaluates its customers' payment histories, amount owed and estimated home value. The bank will contact borrowers who might qualify for the program, beginning in May.
Schakett estimates that the average amount of principal forgiveness or forbearance will be around $62,000 to $65,000. If 45,000 people take the offer and ride it to completion, that will total around $3 billion.