Updated from 2:37 a.m.

Bank of America ( BAC) on Monday said it has created a program that will modify troubled mortgages with up to $8.4 billion in interest rate and principal reductions for close to 400,000 Countrywide Financial customers.

The program was developed with state attorneys general and is designed to "achieve affordable and sustainable mortgage payments" for borrowers who financed their homes with subprime loans or pay-option adjustable rate mortgages serviced by Countrywide and originated prior to Dec. 31, 2007, Bank of America said. Bank of America acquired Countrywide on July 1.

"This is going to provide a tremendous amount of relief," said Illinois Attorney General Lisa Madigan, the Associated Press reports.

Her office and officials from California negotiated the settlement. Nine other states also joined the settlement, and other states could sign on, said Deborah Hagan, chief of Madigan's Consumer Protection Division, the AP reports.

Bank of America said Monday the centerpiece of the program is a "proactive loan modification process to provide relief to eligible borrowers who are seriously delinquent or are likely to become seriously delinquent as a result of loan features, such as rate resets or payment recasts." The program begins Dec. 1.

"Our program represents principal and interest reductions over time to borrowers on loans Countrywide owns and on loans Countrywide services on behalf of investors," said Joe Price, Bank of America's chief financial officer, in a statement. "By taking projected foreclosure losses and instead directing those funds into these proactive foreclosure prevention efforts, we create a solution in the best interests of both our customers and the investors whose loans and securities we service. Of the eligible loans, about 12% are now held by Bank of America. The cost of restructuring these loans is within the range of losses we estimated when we acquired Countrywide."

Bank of America said various options will be considered for eligible customers. First-year payments of principal, interest, taxes and insurance will be targeted to equate to 34% of the borrower's income. In addition, Countrywide won't charge eligible borrowers loan modification fees, and Countrywide will waive prepayment penalties.

The Wall Street Journal reported the program will be shared by Bank of America and investors who own securities composed of mortgages originated by Countrywide or by third parties who sold those loans to Countrywide.

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