CHARLOTTE, N.C. - Bank of America Corp. is giving some of its most troubled mortgage borrowers relief from the threat of foreclosure.
The bank, the largest mortgage servicer in the country, said Wednesday that beginning in May it will forgive up to 30 percent of some customers' total mortgage balance. The homeowners must be at least 60 days delinquent on their loans and owe more than 120 percent of their homes' value.
The plan is part of an agreement the Charlotte, N.C.-based bank reached 18 months ago with state attorneys general to settle charges over high-risk loans made by Countrywide Financial Corp., which Bank of America acquired in mid-2008.
The loans affected by Bank of America's announcement include certain subprime and option adjustable rate mortgages. Option ARMs allow borrowers to start with minimal monthly payments that actually increase the loan's balance.
The borrowers who can take advantage of the Bank of America program must also qualify for the Obama administration's $75-billion mortgage loan modification program.
Bank of America, which was among the hardest hit by the credit crisis and recession, estimates that about 45,000 customers will qualify for its plan.
Although the motivation for the announcement was to resolve legal problems, it has the potential of setting a precedent for other banks to also start forgiving principal on loans that are in danger of failing.
Bank of America is the nation's largest bank, and it's among the first to take a systematic approach to reducing mortgage principal when home values drop well below the amount owed. Millions of homes have gone into foreclosure since the housing market collapsed in late 2007.
The offer will cut total reduced principal by about $3 billion.
According to the plan, 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 Treasury Department, which already has a mortgage modification program, is developing similar plans for principal reductions at other mortgage servicers, according to industry officials speaking on condition of anonymity. They said an announcement could come in the next few months.
"They're talking about doing something and talking seriously about it," said Julia Gordon, senior policy counsel at the Center for Responsible Lending, a consumer group.