Principal reductions may catch on

If practice takes off, lender losses will surface faster

Last March, Bank of America initiated a plan to lower the principal balance on home mortgages by as much as 30 percent for thousands of its distressed borrowers.

The announcement was a bit of a stunner because loan modification programs that are truly intended to shrink monthly payments are all about reducing interest rates or extending terms, i.e., from 30 years to 40 years. Indeed, most lenders would probably rather accept any alternative other than reducing principal as a way of helping borrowers who are underwater with their mortgages.