Some BoA borrowers may get mortgage principal reduction

Bank of AmericaIf you have a payment option ARM, or possibly some other types of ARMs, that are underwater, you may get a letter from Bank of America starting in May to alert you about a new mortgage modification program that will include a reduction in principal. The program will only focus on a certain class of ARMs for homeowners who owe more than 120% of their home's value or in a home where their value is still dropping.

Jumana Bauwens, a spokeswoman for Bank of America, confirmed the story that was first broke by Reuters, but cautioned that the program is not as broad as that story indicated. Bauwens said, "the principal reduction will not be available to all 14 million loans" in Bank of America's system.Initially it will only be available to pay option ARMs and some other types of ARMs that are underwater. In May the bank plans to assess loans in its system to identify homeowners who will be eligible and then will send out letters to those homeowners to inform them about this new modification program that includes reduction of their mortgage principal.

Based on the details in the Reuters story, Bank of America will offer an "earned principal forgiveness" up to 30% of the loan value that will reduce the loan value to 100% over five years. This "forgiveness" will be in a two-stage process. In stage one a portion of the principal to be forgiven will be set aside as an interest-free forbearance of principal. Then stage two is a five-year period during which the homeowner must stay current on his mortgage. After five years of on-time payments the principal set-aside will be forgiven. On some loans that are in danger of imminent default the lender may cut principal to as low as 95%.

Why are banks finally doing what people have been screaming for over the last two years? A lawsuit filed by Bank of America customers in Washington State might help to explain why banks are finally taking action. "We intend to show that Bank of America is acting contrary to the intent and spirit of the TARP program, and is doing so out of financial self Interest," Steve Berman, an attorney representing the plaintiffs, told The suit alleges that Bank of America "intentionally" and "systematically" thwarted and ignored borrower's requests for mortgage modifications.

In response to the lawsuit, Bauwens told King 5 News that "since January 2008, Bank of America has helped more than 760,000 customers with loan modification." She also said the bank had not yet seen the lawsuit. She said these modifications included 500,000 through the bank's own programs, 240,000 active trial modifications through the federal government's Home Affordable Modification Program (HAMP) and 21,000 permanent HAMP modifications.

Yet in the lawsuit filed by Seattle residents Kamie and Daniel Kahlo they tell a story heard over and over again throughout this country about how they made their trial payments, submitted their paperwork and paid a mandated upfront modification fee of $1,400, yet they were not offered a permanent modification. Berman told that the bank used "every excuse to defer the Kahlo family" including the most common I've heard that the paperwork was lost. The lawsuit seeks class-action status. The lawsuit wants the court to order Bank of America to perform its obligations under HAMP and asks for compensatory and other damages.

I'm sure trying to calm public anger toward the banks played a part in Bank of America's decision to finally consider principal reduction. But whatever the reasons behind the decision, clearly this decision may finally truly help those in trouble.

Lita Epstein has written more than 25 stories including "The Complete idiot's Guide to Improving Your Credit Score" and "The Complete Idiot's Guide to Personal Bankruptcy."
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