Bank of America will offer "earned principal forgiveness" to about 45,000 severely underwater homeowners who purchased homes with subprime and adjustable-rate mortgages offered by Countywide Financial Corp. and its subsidiaries.

After acquiring Countrywide in 2008, Bank of America launched an $8.4 billion loan modification program to settle charges by state attorneys general that Countrywide engaged in unfair and deceptive lending practices during the housing boom (see story).

Since its launch, Bank of America says the National Homeownership Retention Program (NHRP) has provided more than 175,000 loan modifications that are expected to save borrowers more than $7.2 billion over the life of those loans.

Bank of America announced today that it’s expanding the program, because many homeowners who owe considerably more on their mortgages than their homes are worth are reluctant to accept loan modifications that address only the amount of their monthly payment without an accompanying reduction in the balance due on the loan.

Under an "earned principal forgiveness" approach, some underwater borrowers with NHRP-eligible loans that also meet the basic qualifications for the Obama administration’s Home Affordable Modification Program (HAMP) will be offered interest-free forbearance of principal.

The principal forbearances may be forgiven altogether if borrowers stay current on their loans for five years.

The offers will be made to homeowners who took out subprime, pay-option adjustable-rate mortgages and prime two-year hybrid ARM loans from Countrywide on or before Jan. 1, 2009, and which now have loan-to-value (LTV) ratios of 120 percent or higher and are delinquent by 60 days or more.

Homeowners will be able earn forgiveness of up to 30 percent of their principal balance over five years, or until their LTV ratio reaches 100 percent. Up to 20 percent of any interest-free forbearance granted will be converted into forgiven principal each year the borrower remains current on the loan.

Tying forgiveness to the homeowner’s performance in repaying the loan reduces the probability of a future default, Bank of America said.

Because a rebound in property values will also help borrowers reach 100 percent LTV, not all of the forbearance granted to borrowers will necessarily be forgiven — a measure that recognizes the interests of mortgage investors, Bank of America said.

The new components of the NHRP program — which also includes the conversion of some pay-option ARMs to fully amortizing loans before recast — are expected to provide $3 billion in total principal reductions, Bank of America said.


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