Last week Bank of America said that it would forgive some mortgage debt to help keep distressed borrowers from losing their homes.

The by-invitation-only program announcement came the same week as the news that BoA had settled a suit brought by the state of Massachusetts for predatory lending.

From the BoA press release announcing its new Earned Principal Forgiveness program:

Bank of America announced it will look first at principal forgiveness – ahead of an interest rate reduction – when modifying certain subprime, Pay-Option and prime two-year hybrid mortgages qualifying for its National Homeownership Retention Program (NHRP). Several enhancements are being made to the program, including the introduction of an earned principal forgiveness approach to modifying mortgages that are severely underwater.

Basically, the program parks a maximum of 30% of the value of the loan in a special interest-free account. As long as the homeowner continues to make payments, a percentage of the principal held in the special interest account will be forgiven each year – either until the balance is zero, or the housing market recovers and the borrower no longer has negative equity.

BoA is targeting delinquent homeowners whose mortgage balance is at least 20% greater than the value of their home.

Read the New York Times coverage of the announcement here.

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