Big Plan to Cut Mortgage Debt Reveal by Bank of America

July 28, 2010
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Bank Launches Big Plan to Cut Mortgage Debt

Bank of America stated that it would trim down mortgage-loan balances in so far as 30% for thousands of troubled borrowers, in what could foretell a wider government effort to encourage banks to offer debt reduction to ease the mortgage crisis.

The plan is one of the boldest moves so far to address the dilemma of millions of U.S. homeowners who owe more on their homes than they are worth. It would make it easier for the Obama administration to move in a similar direction with its present loan-modification program, though senior government officials and many bankers remain very cautious of offering to cut loan balances as the main way of aiding distressed borrowers.

The Obama administration is discussing with banks how to adjust its existing loan-modification program to encourage forgiveness of principal, people familiar with the matter say.

The deed by Bank of America is prominent because it is the largest mortgage provider, collecting loan payments on one of every five home loans in the U.S.

Banks and policy makers have long worried that reducing loan balances for some could spur others to default in hopes of a similar deal. Bank of America said it believed it would limit that risk by requiring borrowers to “earn” the lower balances in stages over five years by keeping up on their new, lowered payments.

Bank of America has come under fire for not doing enough to rework troubled loans.