The following is an abridged FARM letter version of the original article. For the full article, please click here.

In preparation for the deluge of foreclosures expected to wash over California and the country by the end of 2010, Bank of America (B of A) has announced a new program: a $3 billion principal reduction program for homeowner’s with loan-to-value (LTV) ratios exceeding 120% of the home’s current market value. B of A will reduce a homeowner’s LTV ratio to as low as 100%.

This program is limited to homeowners who have either an option-ARM or a two-year rollover ARM.

Participants of this program will have their loan balance bifurcated. The amount available for possible write-off will be separated as non-interest bearing principal, while the amount a borrower is still expected to pay will continue as interest bearing principal.

As soon as the bifurcation occurs, B of A’s loan reduction program resets the payment on the interest-bearing principal to amortize over the remaining term of the 30-year loan. This means higher monthly payments for most of those have already defaulted – a requisite to qualify for this program.

One fifth of the non-interest bearing principal will be available for write off annually for the first three years.

The reduction for the fourth and fifth years is dependent on the price inflation and appreciation of the home. If the property’s value rises, the remaining two-fifths of the non-interest bearing principal gets dumped back onto the interest-bearing principal, with payments reset to fully amortize the increased principal, resulting in even higher monthly payments.

If B of A truly wishes to do society a favor, they will permanently reduce the principal on these ARM loans to LTV levels of 94% in order to make the homeowner solvent and capable of selling or building an equity, as well as turn these explosive short-term ARMs into true real estate loans – long-term, fixed-rate mortgages.