NEW YORK (CNNMoney) -- Bank of America will significantly slash mortgage balances for as many as 200,000 borrowers.
As part of the $26 billion settlement reached between the five major mortgage servicers, the federal government and the attorneys general of 49 states and District of Columbia last month, Bank of America (BAC, Fortune 500) customers who qualify could see their mortgages reduced by an average of $100,000 or more, according to bank spokesman Rick Simon. Those principal reductions are much deeper than the ones originally announced as part of the robo-signing settlement deal.
When the settlement was first announced, the average principal reduction was expected to reduce mortgage balances by an average of about $20,000. Among the five biggest lenders, the reductions are expected to help roughly 1 million homeowners who owe more on their homes than they are worth.
The other four banks, JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500), Wells Fargo (WFC, Fortune 500) and Ally Financial, are expected to reduce qualified borrowers' principal to between 115% and 125% of the value of their homes. Bank of America, meanwhile, is aiming to reduce the amount owed on a home to 100% match the current market value.
Bank of America's deal only applies to the mortgages it owns and some that it services for private investors. Loans backed by government-controlled agencies like Fannie and Freddie or insured by the Federal Housing Administration are not eligible for the program.
Many of the mortgages Bank of America plans to refinance came to the bank through its 2008 acquisition of Countrywide Financial, which issued many high value loans called jumbo mortgages that exceeded the loan limits of Fannie Mae (FNMA, Fortune 500), Freddie Mac (FMCC, Fortune 500). A large percentage of those loans were issued in some of the country's hardest hit housing markets, including California, leaving many of Bank of America's mortgage borrower's deeply underwater on their mortgages, said Simon.
The bank has already identified the 200,000 or so borrowers that it will offer modifications to and will start to reach out to them as soon as a D.C. federal court approves the settlement.
"We expect to get off to a fast start with this program," said Simon.
There are incentives to do that. If the bank is able to demonstrate that it faithfully carried out the provisions of the attorneys general's foreclosure settlement -- as well as a separate settlement in which it agreed to reimburse HUD $1 billion to cover problems originating FHA loans -- over the next three years, it can be forgiven $850 million in penalty payments, said Simon.
The bank has also agreed not to pursue foreclosures against any delinquent borrowers who might be eligible for a mortgage modification as part of the settlement. It will also reform its foreclosure processing to avoid repeating robo-signing abuses, in which bank employees signed hundreds of documents a day, testifying to statements they had no knowledge of.
The deal is one of a series of government-led initiatives aimed at tackling the foreclosure crisis. The latest effort came on Tuesday when the Obama administration announced a plan to reduce refinancing costs for FHA-insured loans.
The U.S. Department of Housing and Urban Development (HUD) advises borrowers who believe they were subjected to foreclosure abuse and may be eligible for a mortgage modification under the settlement to call their servicers and ask for a review of their cases.
HUD said once the agreement was submitted to a court for approval, which was expected to happen on Friday, it would hold a press conference to go over the details.