As the Obama administration readies new proposals to stem the rising tide of foreclosures, several of the nation’s largest banks are implementing programs that include principal reduction features. On Wednesday, Bank of America announced that, in an attempt to encourage greater consumer participation, it is implementing several enhancements to the company’s National Homeownership Retention Program (NHRP), the centerpiece of which is an earned principal forgiveness approach to modifying subprime loans, pay-option adjustable rate mortgages (ARMs) and prime two-year hybrid ARMs that are 60 days or more delinquent with principal balances of 120% or more of the home’s market value. Cooperating with several state attorneys general, Bank of America launched the NHRP in 2008 to provide assistance to Countrywide customers who held certain subprime mortgages and ARMs. Currently, 44 states and the District of Columbia participate in the NHRP and related assistance programs. Bank of America indicated that it worked with Massachusetts, the state to most recently join the program, to develop the current enhancements to the program.

When modifying NHRP-eligible loans, the bank says that it will focus on principal reduction first to reduce monthly payments to 31% of household income, and will then consider an interest rate reduction or other measures if necessary to reach the targeted payment. The earned principal forgiveness will consist of an interest-free forbearance of the principal balance over a five-year period, which can result in an up to 30% reduction in the loan principal balance (to return the loan to 100% loan-to-value) if the homeowner remains current on mortgage payments over the period of time. Other proposed changes include programs to offer modifications on certain pay-option ARMs, eliminating the negative amortization feature and forgiving a portion of the negative amortization amount to reduce the principal balance and payments on such loans.  

Citing a similar goal to help families keep their homes, Citigroup announced on Thursday, that it will participate in the administration’s second lien modification program (2MP). Citi joins JP Morgan Chase (which announced earlier in the week that it would join the 2MP program), Bank of America, and Wells Fargo as participants in the program.  

The 2MP program was designed to work in tandem with the Home Affordable Modification Program (HAMP) and is aimed at modifying second-lien mortgages to reduce monthly payments for struggling home owners. According to JP Morgan, under the 2MP program, homeowners who successfully complete a trial modification of their first mortgage could see the interest rate on their second lien reduced as low as 1 percent for five years.