Bank of America (BAC) mailed letters to more than 200,000 mortgage borrowers for potential principal reduction under the robo-signing settlement.

The deal with the 49 state attorneys general and the five largest mortgage servicers was approved in March. It requires BofA to provide $11 billion in relief and fines for past foreclosure abuses and mishandled documentation. But soon after, the bank reached a side deal to provide more principal reduction and avoid roughly $850 million in fines.

The bank actually began some principal reduction in March. It offered 5,000 trial modifications with more than $700 million in write-downs.

To be eligible, a borrower must owe more on the mortgage than the home is worth, must be at least 60 days delinquent as of Jan. 31. The principal, interest, property tax and insurance must total more than 25% of the borrowers monthly income.

BofA said the write-downs will occur on its portfolio book but also for private mortgage bonds. The bank said investors in these securities gave the authority for the reduction. Fannie Mae and Freddie Mac loans are not eligible.

The bank expects the qualifying loans to be written down to a 100% loan-to-value ratio. Then, the interest rate will be lowered and it could forbear additional principal to save borrowers roughly 30% on their mortgage payments.

“Building on home retention and payment assistance programs already in place, we are meeting our obligation to deliver this additional relief to our customers following the completion of the recent global mortgage settlement,” said Ron Sturzenegger, who runs the bank’s legacy asset services division. “To the extent principal reduction and other modification tools help us turn mortgages headed for possible foreclosure into long-term performing loans, it will be positive for homeowners, mortgage investors and communities.”


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