Bank of America, the nation’s largest mortgage lender, on Wednesday announced a program to offer homeowners who owe significantly more than their homes are worth the opportunity to have their loan balances reduced. The program, which starts in May, would potentially help about 45,000 homeowners nationwide. In launching the effort, Bank of America is jumping into the debate about how to address the millions of homeowners whose mortgages exceed the value of their homes and who have complicated industry and government efforts to prevent foreclosures. Lenders have traditionally resisted reducing borrowers’ loan balances, arguing that doing so would encourage homeowners to miss mortgage payments to qualify. But as foreclosure-prevention efforts have struggled, the industry has started to relent. Bank of America is hoping that by reducing principal balances it will give borrowers an incentive to keep up with their payments and potentially create an industry model. The company “has found that many homeowners who owe considerably more on their mortgages than their homes are worth are reluctant to accept a solution that addresses only the amount of the payment without an accompanying reduction in the balance due on the loan,” said Barbara Desoer, president of Bank of America Home Loans. The Bank of America plan is limited in scope. Borrowers must have missed at least two mortgage payments and be severely underwater to qualify, owing 20 percent more than their homes are worth. It is also limited to borrowers with certain types of risky loans, including subprime mortgages or other loans with a two-year adjustable rate. Bank of America expects to forgive about $3 billion in principal on loans as part of the program. The effort expands a settlement agreement that the bank made with several state attorneys general in 2008 to modify thousands of mortgages and settles a Massachusetts investigation of lending practices by Countrywide Financial, which Bank of America acquired in 2008. Treasury officials have said they were considering proposals to address negative equity, but have not given a timeline for announcing a plan. Under the federal foreclosure-relief program known as Making Home Affordable, borrowers can receive up to $5,000 to lower their loan balances if they keep up their payments. But that amount would make only a small dent in the problem facing millions of homeowners, housing advocates have said. Economists consider underwater borrowers among the most vulnerable to foreclosure, even if they can afford their mortgages, and some industry officials worry that more of them will simply walk away from their mortgages, or “strategically default,” rather than spend a decade or more trying to regain positive equity. First American CoreLogic has estimated that more than 11.3 million homeowners are underwater on their mortgages. During the third quarter of 2009, 13 percent of loan modifications included a reduction in the borrower’s principal, up from 10 percent during the second quarter, according to a report by the Office of the Comptroller of the Currency. Wells Fargo, for example, says it has increasingly used principal reductions for homeowners with “pay option arm” loans. The bank says it forgave $2.6 billion in borrowers’ principal balances for these types of mortgages last year.

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