Bank of America announced Wednesday that it will first look at reducing the loan balances of certain distressed homeowners with subprime or adjustable rate mortgages to make their payments more affordable.
Financial institutions, as well as the Obama administration, have come under increasing pressure in recent months to add principal reduction to their foreclosure prevention efforts.
When modifying mortgages, Bank of America will initially consider reducing the balances of borrowers with qualifying subprime, Pay-Option ARMs and prime 2-year hybrid ARM loans to bring down the monthly payments to 31% of pre-tax income. Currently, banks first look to reduce interest rates or lengthen the term.
Homeowners who are at least 60 days late and whose mortgages total at more than 120% of their home's value can have their balances reduced over five years by a maximum of 30%.
Borrowers must first qualify for the servicer's National Homeownership Retention Program. The program was developed as part of a 2008 settlement with state attorneys general to assist Countrywide Financial Corp. borrowers with subprime and Pay-Option ARMs. Countrywide was acquired by Bank of America in July 2008.
Pay-Option ARMs allow borrowers to make tiny monthly payments, but the unpaid interest is tacked onto the mortgage balance.