Bank of America (NYSE: BAC) to Reduce Mortgage Balances for Distressed Borrowers

Bank of America (NYSE: BAC) announced on Wednesday that it would begin forgiving a percentage of mortgage debt in order to help distressed borrowers from having their homes foreclosed on.

The program is currently limited in scope and is by invitation only, but signals a significant shift in efforts to deal with the millions of homeowners that are facing foreclosure. The announcement of the debt forgiveness program comes as banks are being urged by the U.S. Government as well as community groups to do more to prevent foreclosures.

The move by Bank of America may increase pressure on other large-cap banks to offer more assistance to distressed borrowers while potentially angering homeowners that have kept their payments current and will not be getting aid from the bank..

The housing market is beginning to slow down and worries about foreclosure rates are growing as the possibility of entering a second downturn in the housing market becomes an increasingly real possibility. Volumes of sales are falling and prices are beginning to slide again. As the gap increases between the size of a mortgage and the value of a home, homeowners tend to give up trying to save their house.

Bank of America believes that cutting the size of distressed homeowner’s debt over a period of years might encourage them to try to stay in their homes, potentially preventing foreclosures and stabilizing neighborhoods. Bank of America appears to be willing to take some level of loss in the present in order to avoid potentially greater future losses if the housing market takes a further slide.

The program will be aimed at borrowers that received sub-prime loans from Countrywide Financial, which is now owned by Bank of America. Company officials said that the maximum reduction that borrowers would receive is a 30% reduction on the principal balance of the loan. Bank of America said that a percentage of the borrower’s debt would be placed into a special interest free account that would be forgiven over a period of years as long as the borrower remains current on their mortgage payments.

Bank of America said that its new debt forgiveness program will initially help 45,000 Countrywide borrowers and estimated that it would reduce principal balances by a total of $3 billion.