Recently, Bank of America launched a new program called the Principal Reduction Plan.  According to the plan, people who have home loans with Bank of America and Countrywide and are 60 days or more late on their monthly payments may qualify for “earned principal forgiveness”.  Loans that qualify are, “pay option ARMs, prime two-year hybrid mortgages and subprime loans initially offered by Countrywide. Fannie Mae and Freddie Mac loans will not be eligible”. (Wallet Pop)

Essentially, the purpose of the new plan is to reduce borrowers’ principal balances and to help homeowners avoid foreclosure.  Bank of America promised that it would eliminate, “$3 billion in principal owed by thousands of severely delinquent borrowers who owe more than their homes are worth,” reports the Los Angeles Times.  Many say that the plan came into existence due to increasing pressure from the government for banks to reduce the number of foreclosures and offer assistance to needy homeowners.

“Modifications are better than foreclosure,” said Bank of America executive, Jack Schakett, during a media conference. “The time has come to test this kind of program.”

The new program is expected to launch in May.  At this time, Bank of America says that it has 1.5 million borrowers who are 60 days or more behind on their mortgages.  The bank claims that it will reach out to qualified borrowers, but warns that not all borrowers who have defaulted on their loans will qualify.  Wallet Pop reports that only, “45,000 customers will ultimately qualify for this program.”

Prior to the introduction of the Principal Reduction Plan, banks have tried to combat foreclosures by offering loan modifications.  However, during loan modifications, banks would traditionally lower interest rates, increase loan terms or reduce late fees.  Until now, banks have always been resistant to reducing borrowers’ principal balances.  After realizing that homeowners are considering leaving their homes instead of paying high mortgage payments, banks are being more aggressive and presenting solutions.

The Los Angeles Times says that, “If successful, the plan could become a model for other lenders.”  Should this happen, the fragile real estate market may regain some stability and the number of foreclosures in the United States could decrease – a great win for homeowners throughout the country.  With Bank of America daring to take this huge step and put homeowners’ needs first, it is only a matter of time before other financial institutions feel pressured to follow in its lead.

Read Full Articles:
How Bank of America’s Principal Reduction Plan Will Work (Wallet Pop)

Bank of America to Reduce Mortgage Principal for Some Borrowers (Los Angeles Times)