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RISMEDIA, March 14, 2011—(MCT)—Bank of America Corp. recently announced a mortgage modification program for military customers, including principal forgiveness for some struggling borrowers. The Charlotte bank said the program assists military members who are leaving active duty and having trouble making their mortgage payments.

The announcement comes as big banks are in settlement discussions with banking regulators and state attorneys general over their handling of foreclosures and modifications. The banks may face a requirement that they reduce principal for borrowers, a measure they’re resisting.

At a recent investor conference, Terry Laughlin, the Bank of America executive in charge of distressed loans, said principal reduction was no “panacea” because borrowers without sufficient income still can’t make payments. Chief Executive Brian Moynihan also painted it as a fairness issue, saying “when you start helping certain people and don’t help other people, it’s going to be very hard to explain the difference.”

Wells Fargo & Co. CEO John Stumpf recently stated that principal reduction is “not always the answer.” He expressed concern that such a mandate could encourage customers who are current on their loans to stop paying. Of Wells customers whose mortgages are “underwater,” there are more making their payments than not, he said. “It would make no sense to create an environment where people could be incented not to pay their debts where they could pay,” Stumpf said.

Stumpf said principal reduction isn’t priced into the $40 a month Wells makes servicing the average home loan for investors. He also said it would have a “huge impact” on Freddie Mac and Fannie Mae, the government-controlled mortgage giants that own half of the loans serviced by the San Francisco-based bank.

Principal reduction is a tool in the bank’s tool box, he said, but only for specific situations involving loans owned by the bank. So far, Wells has reduced customers’ balances by nearly $4 billion. Principal reduction has been an option for customers with Pick-A-Payment adjustable rate mortgages inherited in the bank’s purchase of Charlotte’s Wachovia Corp.

To make payments affordable, Bank of America’s new program will first reduce the amount owed on a borrower’s mortgage to as low as 100% of the home’s current market value. After that, the bank can also reduce the interest rate on the loan, as needed.

Starting April 1, Bank of America said, it also will offer a 4% interest rate on mortgages for active duty military members while they are under the protection of the Servicemembers Civil Relief Act, lower than the 6% that is required.

The bank said the modification program and the lower interest rates will initially be offered to customers with loans owned and serviced by the bank. It said it’s in discussions with investors in other mortgages that it services.

“Military men and women face extraordinary circumstances, and they make unique sacrifices for all of us,” said Laughlin in a statement. “For these reasons, we want this combination of tools to address their needs and help them when they need it most.”

(c) 2011, The Charlotte Observer (Charlotte, N.C.).

Distributed by McClatchy-Tribune Information Services.