Bank Of America: To Forgive And Forget

Mortgage lenders are caving in to government pressure to reduce loan balances and avoid foreclosures. And it just might work.

Among the government bailouts none has fallen as flat as modifying mortgages so that borrowers don't lose their homes. Reducing monthly payments by lowering interest rates hasn't stemmed defaults because the most troubled mortgages are often those in which the house is worth far less than the loan. Wednesday, Bank of America said it would try reducing the principal on those mortgages in hopes of keeping borrowers current. If it works, the bank and 45,000 Americans will make out better than they would have otherwise, but it could also set a precedent rife with moral hazard.
Bank of America ( BAC - news - people )'s plan is to forgive principal on mortgages where the loan is worth at least 20% more than the property. Those include exotic and irresponsible loans like option ARMs that let homebuyers pay no interest for a time as their balance balloons, but also prime loans that have fallen delinquent. Barclays Capital analyst Jason Goldberg estimates the forgiven amount could be as much as $3 billion.