When Bank of America bought out Countrywide in 2008, party of the package was $25 billion in pay-option adjustable-rate mortgages.
And because Bank of America fully expected that billions of dollar’s worth of those loans would fail, they paid only $13.9 Billion for them.
A pay-option ARM is an interesting loan product. This is an adjustable-rate mortgage in which the borrower chooses the payment. Under one of the options available to these borrowers, they are actually in a negative amortization situation. While their loan interest might be $1,000 per month, they might choose to pay only $800 – and that extra $200 is simply added to the principal balance of their loan.
Now, in a move designed to keep many of those underwater loans out of foreclosure, Bank of America will be offering debt reduction to approximately 45,000 homeowners. If everyone takes advantage of the offer, the amount forgiven could be as much as $3 billion. Far less than the $11.1 billion
In the case of pay-option arms, Bank of America will supposedly offer forgiveness of some or all of the debt that was added to their loan principal as a result of the monthly unpaid interest. Thus, rather than owing more than the original amount, they’ll be set back to their original loan amount.
Since this may not reduce the payment enough to make the homeowner eligible for a modification under the HAMP guidelines and thus remain in the homes, making payments, Bank of America has another, more complicated plan in mind.
This second stage plan is called “Earned principal forgiveness,” but it isn’t what it sounds like. Under this plan, in which the bank “forbears principal,” the homeowner must owe at least 20% more than the house is worth in the current market.
To begin with, the bank will forbear collecting interest on a portion of the loan amount. If you owe $150,000 but can only afford to make payments on $120,000, they’ll remove the remaining $30,000 from the balance upon which interest is charged. But you will still owe that $30,000.
Then, if you stay current on the loan, each year for the first three years, one-fifth of that forborn amount will be forgiven. One fifth of $30,000 is $6,000 – so in this example you would now owe $144,000 at the end of the first year, $138,000 at the end of the second year, and $132,000 by the time you had stayed current with payments for 3 years.
The plans are complicated, and you cannot make application. But if you have a pay-option ARM, a sub-prime loan, or a prime 2-year ARM that originated with Countrywide, you may get a letter inviting you to participate.
Be sure to read the fine print and understand it thoroughly before you agree.
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