There is finally good news for the millions of homeowners who find themselves under water on their mortgages. On Wednesday the nation’s largest provider of home loans, Bank of America, announced new steps to forgive some mortgage principal to keep homeowners out of foreclosure.

Unlike past program which have focused on restructuring loans to make monthly payments more affordable, Bank of America’s move is one of the first to focus on where the real problem lies: lower home values. Many consumers who bought homes at the height of the housing boom a few years ago now owe tens of thousands of dollars more on their mortgages than their house is worth – a situation known as being under water on your loan.

An increasing number of borrowers have come to realize that the only option available to them is to walk away from the home and completely stop paying the mortgage. The thinking goes: why keep paying off a mortgage on a home that may never get back to its previous value, especially when the option to rent is so much cheaper? These consumers have decided that waiting until their credit records recover and then stepping back into the housing market makes more sense than sticking it out.

The problem for banks like B of A is that each homeowner that walks away from a house costs the bank tens of thousands of dollars in carrying and remarketing costs. Banks are making the calculation that taking some losses now is better than even bigger losses down the road if the housing market continues to deteriorate.

Under the B of A pilot program, a select number of homeowners would have a portion of their principal reduced – in effect acknowledging the fact that the house is now worth less. With a lower principal comes a smaller mortgage and less costly mortgage payments.

The Bank of America offer is now only available by invitation only, but there is widespread hope that this pilot program will be expanded to the millions of homeowners who hold mortgages from the bank. B of A’s leadership on this issue may also encourage other banks to follow suit.

If there is a widespread adoption of reducing principal and not just restructuring over valued mortgages, it could put a real dent in the foreclosure crisis. That is turn would boost the overall housing market which is being dragged down by the excess inventory of foreclosed homes.

The bottom line: if you’re currently facing foreclosure this program will probably not roll out fast enough to help you unless you are one of the lucky few that Bank of America invites to participate. But if you can hang in there a little longer help may finally be on its way.

photo credit: mrkathika