Bank of America’s Earned Principal Forgiveness Program

         This month Bank of America unveiled a new approach to the HAMP modification program. The new “Earned Principal Forgiveness” Program will forgive up to 30 percent of some customers’ total mortgage balances. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth, with a current loan-to-value (LTV) ratio of 120 percent or higher.  Bank of America will first offer to set aside a portion of the principal balance, interest free. That principal can be forgiven over five years, if homeowners don’t miss any payments. The maximum decrease in principal will be 30 percent.  The forgiveness allows a homeowner to bring a mortgage balance back down to 100 percent of the home’s value.

          The key components to the Earned Principal Forgiveness Program include:

                   1.       An interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years resulting in a maximum 30% decrease in the loan principal balance to as low as 100 percent LTV.


                   2.       In each of the first five years, up to 20 percent of the forborne amount will be forgiven annually for borrowers that remain in good standing on their mortgage payments.


                   3.       Forgiveness installments for the first three years are set at the 20 percent level.


                   4.       In the fourth and fifth years, the amount of forgiveness will be dependent upon the updated value of the property, so that the LTV will not be reduced below 100 percent through principal forgiveness.


          The Earned Principal Forgiveness Program promises to help homeowners with severely underwater mortgages with some of the highest rates of delinquency–specifically sub-prime loans, pay-option ARMs, and prime two-year hybrid ARMs that are 60 days or more delinquent with a principal balance of 120 percent or more.  At the same time, the Earned Principal Forgiveness Program also recognizes and addresses the interests of mortgage investors by ensuring that forgiveness is tied to the homeowner’s performance, reducing the probability of a future default under the modified terms, and adjusting the total amount to be forgiven in light of any gains in property values that might occur in an economic recovery.


Ray Garcia, Esq. Board Certified in Real Estate Law by the Florida Bar


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