BofA to start reducing mortgage principal

WASHINGTON: Bank of America will on Wednesday (March 24) announce plans to start forgiving mortgage loan principal for troubled homeowners who owe more than 120% of their home's value or are battling ever-expanding "negative amortisation" loans.

According to a summary of the programme obtained by Reuters, Bank of America pledged to offer an "earned principal forgiveness" of up to 30% in two stages. The lender will first offer an interest-free forbearance of principal that the homeowner can turn into forgiven principal annually over five years, provided they stay current on their payments.

The forgiveness can allow a homeowner to bring the loan value back down to 100% of the home's value over five years, according to the plan, confirmed by sources close to the matter.

The plan, to begin in May, is among the first by a US mortgage lender that takes a systematic approach to reducing mortgage principal to tackle the thorny issue of preventing foreclosures when home values drop well below the amount owed.

A Bank of America spokesman declined comment.

Announcement of the programme in Washington comes as US lawmakers and housing advocates are becoming increasingly vocal about the need for principal writedowns in order to save homes on a large scale. Amid stubbornly high unemployment, homeowners are seen as more likely to simply abandon an unaffordable mortgage when they have no equity or are deep "underwater" on the loan.

The US Treasury's mortgage modification programme has largely relied on reducing interest rates, and has been criticised for failing to address a steep and painful reduction in home values.

The announcement also will come two days after two Washington state residents sued Bank of America for allegedly reneging on a promise it made to modify troubled mortgages when it took US$25 billion (RM83 billion) in taxpayer bailout money.

The lawsuit alleged that the lender has "seriously strung out, delayed and otherwised hindered" modifications because it had financial incentives to do so. -- Reuters