By Nick Timiraos, Wall Street Journal

Don’t call us, we’ll call you—that was the message on Wednesday from Bank of America executives who announced the bank’s new effort to modify mortgages by cutting loan balances.

Under the program, Bank of America will reduce certain loans by up to 30% in order to lower monthly payments for borrowers facing foreclosure. While banks have selectively used principal write-downs to modify loans that they own, Bank of America’s approach could represent the beginning of broader efforts by banks to add write-downs as a more common tool in their loan-modification arsenal.

Here’s how it works: only borrowers who had loans from Countrywide Financial, which Bank of America acquired in mid-2008, will be eligible. And only the riskiest loans will qualify: subprime loans, “option adjustable-rate” mortgages that have low initial monthly payments but that can adjust sharply higher, and certain prime loans that have a fixed interest rate for the first two years before starting to adjust annually.

The program is also limited to customers who have missed at least two consecutive payments, who can demonstrate that a financial hardship prevents them from making payments at the current level, and whose loan balance is at least 120% of the estimated home value.

Bank of America will go through its loan book to see which loans might qualify for reductions (while checking property values to see which ones are far enough under water), and then the bank will reach out to those who may be eligible. “Our customers do not need to take any actions at this time,” said Jack Schakett, a credit-loss mitigation executive.

Why all the qualification restrictions? For starters, banks and policy makers have long worried that they could up end the housing market if they offer principal write-downs too widely. Borrowers who are current but who owe more than their homes are worth, known as being “under water,” might stop paying to get a better deal. So it makes sense to start with a narrow pool of borrowers, particularly one that already has sky-high default rates.

Another reason: Bank of America is offering these modifications as part of a settlement reached Wednesday with the commonwealth of Massachusetts. The settlement is fairly detailed in prescribing what kinds of modifications Bank of America has to take with its Countrywide loans. (In an interview, Massachusetts Attorney General Martha Coakley said she pushed for principal reductions in the settlement because she didn’t want any bank to be “modifying a loan for the sake of modifying it, and finding two months, or six months, or a year later that it’s still going to be foreclosed on without getting to the root of the problem.”)

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