Bank of America (BAC) will consider principal forgiveness before an interest rate reduction when modifying some mortgages for its National Homeownership Retention Program (NHRP). New changes to the NHRP allow certain subprime, Pay-Option and prime two-year hybrid mortgages to qualify for principal forgiveness to bring severely underwater loans closer to the surface. With the changes, BofA will look at reducing the principal of a mortgage before reducing the interest rate when modifying a loan under the Home Affordable Modification Program (HAMP). BofA currently holds more than 1m HAMP-eligible loans in its portfolio, according to the US Treasury Department, and through February conducted more than 20,000 permanent modifications, the second most of any participating servicer. All 113 servicers provided a total of 170,000 permanent modifications. Under HAMP, servicers attempt to reduce the monthly mortgage payment ratio to less than 31% of the verified income. To do that, they run the loan through a waterfall of modification steps, which include an interest rate reduction, a term extension, then principal forbearance. BofA expects to implement principal reduction into the modification waterfall by June 2010 as the bank searches for eligible mortgages and contacts qualifying borrowers. The loans must be at least 60 days delinquent and have a loan-to-value ratio of 120% or higher. BofA estimates that will be able to offer the principal reductions to 45,000 of its borrowers who qualify for a HAMP modification. The Commonwealth of Massachusetts worked with BofA to design the new changes and became the 44th state to join the NHRP. BofA launched the program in 2008 to provide assistance to Countrywide borrowers who received subprime and Pay-Option adjustable rate mortgages (ARMs). Write to Jon Prior.