One of the architects of the $26 billion settlement with five major servicers expects some borrowers will see the principal balance of their mortgages reduced by over $100,000.

“In the deeply underwater states of California and Nevada, principal reductions are exceeding $100,000 per homeowner,” HUD secretary Shaun Donovan told a Senate panel Tuesday.

“In states like North Carolina, we would expect to see more in the range of $50,000 to $100,000 on average,” Donovan said.

Separately, Bank of America said it has started mailing the first of 200,000 notices to borrowers who may qualify for a principal reduction under the terms of the settlement agreement with the state AGs and federal officials.

“So far, under this early initiative, about 5,000 trial modifications have been mailed, providing a potential total of more than $700 million in forgiven principal,” according to BofA servicing executive Ron Sturzenegger.

Under the terms of the settlement, the servicers must reduce the borrower’s mortgage payments to a sustainable and affordable level.

To achieve this result, BofA said it will first reduce the principal balance to as low as 100% of the current property value. Then it will lower the interest rate and forebear on additional principal, “as necessary to reach the target payment.”

If B of A owns the second mortgage, the bank has to write down the second in proportion to the writedown on the first loan.

“We require significant writedowns in the second liens,” the Housing and Urban Development secretary said at Tuesday’s hearing. And servicers must extinguish the second lien if it is 180 days or more past due under the terms of the settlement.

Donovan added that more rules are needed to force reductions of second liens. “We are talking to investors about whether there are further steps we can take,” he testified.

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