Bank of America began to reduce the principal amount of mortgage loan modifications

Bank of America Corp., one of the largest mortgage lenders in Florida, said Wednesday it will give some troubled mortgage borrowers a huge break.

It will forgive up to 30 percent of some customers' total mortgage balance.

But the bank remains under fire in Florida, where hundreds of borrowers have lodged complaints with Attorney General Bill McCollum over its reluctance to modify mortgages, lost paperwork, or canceled deals for borrowers who are making their payments on time.

As the nation's largest bank, Bank of America could lead the way for other lenders to start reducing principal, which is the amount the borrower owes. The U.S. Treasury Department has discussed making principal reductions a step in the Obama Administration's loan modification program. And, a group of influential mortgage investors recently called for it to become an industrywide practice.

"It's a step in the right direction," said Peter E.S. Wallis, a Pompano Beach attorney who handles foreclosure defense cases. "We need to have all the major lenders, all the mortgage holders, to follow suit to bring principal reductions into line across the board."

The plan, which would begin in May, is part of an agreement the Charlotte, N.C.-based bank reached 18 months ago with state attorneys general to settle charges over high-risk loans made by Countrywide Financial Corp. Florida was part of that agreement. The loans were made before Bank of America acquired Countrywide in mid-2008.

Those loans continue to trouble borrowers like Lynn Mankin of Coral Springs, whose lender was Countrywide and who has been battling Bank of America over a loan modification. She withdrew money – before retirement -- from her 401(k) account to keep paying her mortgage, after losing her job. But Bank of America later cancelled her loan modification. Her reaction to Wednesday's announcment was skeptical: "I'm from Missouri," she said. "Show me."

Under Bank of America's proposal, homeowners must be at least 60 days delinquent on their loans and owe more than 120 percent of their homes' value. Thousands of South Florida borrowers are "underwater" on their mortgages, meaning they owe more than their home is worth.

Roughly 54 percent of Broward County mortgage holders – 246,675 homeowners – are underwater, according to First American CoreLogic, a California research firm. In Palm Beach County, 45 percent of mortgage holders – 157,544 homeowners – face that problem.

Bank of America is the nation's largest lender to systematically reduce principal, but it is not the first.

Ocwen Financial, based in West Palm Beach and a servicer of risky loans, has reduced principal on 15 percent of the 100,000 loans it has modified from its portfolio of 300,000 loans. It began reducing principal even before the Obama administration's foreclosure program Making Home Affordable began a year ago.

Millions of homes have gone into foreclosure since the housing market collapsed in late 2007. The loans affected by Bank of America's announcement include certain subprime and option adjustable rate mortgages. Option ARMs allow borrowers to start with minimal monthly payments that actually increase the loan's balance.

The borrowers who can take advantage of the Bank of America program must also qualify for the Obama administration's $75 billion mortgage loan modification program.

Bank of America estimates that about 45,000 customers will qualify for its plan. It's unclear how many South Florida homeowners might qualify.

The offer will cut total reduced principal by about $3 billion. That could lower the bank's earnings, which have already been hurt by consumers' continuing defaults on mortgage and credit card loans. Bank of America was among the hardest hit by the credit crisis and recession.

Even so, "the move helps create the best prospect of avoiding a further downward home price spiral, which would result in even deeper losses" for the bank, said Howard Glaser, a mortgage industry consultant, in an e-mail.

According to new plan, Bank of America will first offer to set aside a portion of the principal balance, interest free. That principal can be forgiven over five years, if homeowners don't miss any payments. The maximum decrease in principal will be 30 percent.

The forgiveness allows a homeowner to bring a mortgage balance back down to 100 percent of the home's value, the bank said.

Glaser said the program could lead the Obama administration to launch a similar effort for the entire industry. That, he wrote, would be a "major shift in loan modification efforts."'

Lenders including Bank of America have been criticized for not helping enough borrowers to complete the Obama administration's $75 billion loan modification program, which is widely viewed as a disappointment. Only 170,000 homeowners have completed the program so far.

As of last month, Bank of America had completed modifications for about 22,000 homeowners, or about 8 percent of those signed up. That compares with about 12 percent for Wells Fargo & Co. and 11 percent for both JPMorgan Chase & Co. and Citigroup Inc.

The Treasury Department estimates that 1.5 million to 2 million homeowners will complete the program by the end of 2012, about half of the original goal. A report issued late Tuesday by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, says numerous changes to government guidelines "caused confusion and delay" and said the government did not do enough to advertise the program.