Bank of America announced it has begun mailing letters to the first wave of up to 200,000 homeowners who are eligible for mortgage principal reductions, part of a settlement the bank worked out with the federal government and 49 state attorneys general. In a statement, the bank says homeowners who qualify will see an average monthly savings of 30%, once both principal and interest deductions are taken into account.
BofA began a trial modification program back in March that included around 5,000 homeowners and delivered a collective $700 million in savings, according to the bank.
The average principal reduction for homeowners who complete modifications under this expanded program will be $150,000, according to bank spokeswoman Jumana Bauwens. That’s some serious relief. Mortgage modifications in which the principal is reduced have been very rare; more common variations involve extending the term of the loan and/or lowering the interest rate to give the homeowner some relief on their monthly payments. Bank of America’s program extends only to homeowners whose loan is held by BofA or an investor that has agreed to participate, and it doesn’t include Fannie Mae, Freddie Mac or FHA-backed loans.
There are three other criteria: The homeowners must be underwater; that is, owe more than the property is currently worth. They must have been at least 60 days delinquent on payments as of January 31 of this year. Their combined monthly payment, including insurance, taxes and any homeowner association fees, along with mortgage principal and interest, must total more than 25% of their gross household income. For the reductions to be permanent, homeowners have to make three on-time payments after their modifications are completed.
It’s unclear whether the principal reductions will affect homeowners’ credit scores. “There is no published direction on how to report principal reduction under the DOJ agreement at present,” says FICO spokesman Anthony Sprauve. “So, if the lender reports with standard loan modification reporting codes, there would be no difference in FICO score impact.” But Bauwens says it’s possible credit scores may be affected.
Of course, homeowners who are more than 60 days behind on their mortgage payments have already suffered a substantial hit to their credit report. A recent study found that 90-day mortgage delinquencies had an impact of anywhere from 60 to 130 points on a person’s credit score. People starting out with higher scores had the biggest drop in points.
Bank of America says most of the letters offering principal relief will be mailed by the third quarter of this year. Bauwens does caution that not all of the 200,000 people who get letters will end up qualifying for principal reductions. BofA Home Loans customers can call (877) 488-7814 to get information about the program.
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