Bank of America to offer mortgage forgiveness

Loans eligible for mortgage forgiveness

Loans eligible for mortgage forgiveness include those who got pay-option adjustable rate mortgages (ARMs) and subprime ARMs, and some who got prime two-year ARMs.

For pay-option ARM customers, Bank of America will offer to forgive some or all of the added principal due to negative amortization. If the entire negative amortization debt is erased, the customer still has to pay the remaining original mortgage amount.

Pay-option ARMs are those adjustable rate mortgages in which the borrower chooses the amount of the payment, The borrower typically has four options to choose from, in the case of one of the options, if the payment is lower than the interest, the difference is added on to the mortgage. This accumulated difference is called negative amortization.

"Earned principal forgiveness" may be offered on subprime ARMs as well as on pay-option ARMs. To qualify, the borrower has to owe at least 20 percent more than the home is worth and be 60 days delinquent on the loan. For these customers, Bank of America will not charge interest on the principal that is forgiven for five years.

For example, if you owe $120,000 on a house that is valued at $100,000. The bank will forgive $20,000 of the principal and charge you interest only on the remaining $100,000. However, you still owe the bank the forgiven $20,000, but don't have to pay interest on it.

In the bank's experience, many homeowners who are underwater on their mortgages, are reluctant to accept a solution without a reduction in the balance due on the loan, said Barbara Desoer, president of Bank of America Home Loans.

Customers eligible for mortgage forgiveness

The bank estimates that the program will be offered to about 45,000 customers, totalling $3 billion in forgiven principal. The bank also said it will proactively contact customers who are eligible for principal forgiveness.

Bank of America is expected to begin this program in May.