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There's an unfamiliar trend emerging in America's troubled housing market. Big banks are volunteering to lose money, hundreds of millions of dollars, in order to save homes at risk of foreclosure.

NPR's Aarti Shahani reports on how this solution gained traction in Boston and why it's going national.

(SOUNDBITE OF KNOCKING)

SHARON JORDAN: Well, welcome to my house. You know, we do have a doorbell.

AARTI SHAHANI, BYLINE: Sharon Jordan begins a tour of her three-story duplex. It's on the verge of foreclosure.

JORDAN: This is my living room, nice and quaint as it is, and this is my mother.

SHAHANI: She's pointing to a picture on the mantel. Sheila May Jordan died last year. She was a nurse. In 2006, she bought the family's first ever house here in Dorchester. Sharon Jordan was sorting through her mom's boxes when she stumbled across letters from Bank of America. Turns out, Mom stops paying the mortgage after a heart attack. Jordan called the bank immediately.

JORDAN: Is there any way that you all can help me help myself because I don't want to lose the home. We worked too hard to get it. I don't want to lose it.

SHAHANI: Her mom bought the house for $521,000. Then the housing bubble burst. Now, it's worth half that. Jordan told Bank of America...

JORDAN: Sell it to me and I'll buy it from you, but I don't want to buy it at that price.

SHAHANI: She wanted 50 percent off. That's what it's worth and that would cut monthly mortgage payments in half. Her solution is called a principle write-down. Bank of America said, no. Elyse Cherry took that no for a maybe. She's the CEO of a nonprofit group called Boston Community Capital. Cherry knew the bubble would burst well before it happened.

ELYSE CHERRY: What we saw were housing prices skyrocketing, even though incomes were flat. We had a hairdresser come in who made an annual income of $23,000. She had a mortgage of $325,000.

SHAHANI: Housing prices have plunged back down to earth. Cherry says it's time to match affordable homes with people who can actually afford them. That's her business, in fact. Boston Community Capital runs an investment fund. Cherry's going to the major banks with an offer.

CHERRY: You sell everything that you've got at current market prices so that you clear your books, you take your losses and then you - as a healthier lender - can go back out and lend some more.

SHAHANI: Boston Community Capital is willing to buy the most distressed homes at the going rate and take on the risk of reselling to homeowners like Jordan. The nonprofit actually makes some money by selling at a slight markup.

In a foreclosure, banks make nothing. Worse yet, they lose in missed mortgage payments, taxes, insurance, eviction fees. Cherry's appeal is simple.

CHERRY: We can reduce your cost.

SHAHANI: Bank of America was the first to bite. They launched the pilot project with the nonprofit.

REBECCA MAIRONE: We think this is a very good test in concept.

SHAHANI: That's Rebecca Mairone. She leads efforts at Bank of America to help delinquent customers keep their homes. That job description might sound ironic. Bank of America just settled a $335 million lawsuit for unfair practices related to its countrywide unit. It's the largest settlement for housing discrimination in American history.

A few months ago, the bank mailed distressed borrowers with good news. They could apply to sell and re-buy their homes. A Boston nonprofit would help them. The solution isn't perfect. Some bank execs and investors are concerned that home owners will default on payments. Strategic defaults just to get the benefit of a cheaper house. But Mairone says that fear is overblown.

MAIRONE: In most cases, what we see is real hardship. People want to stay in their homes. They continue to pay and they don't want their credit to be severely impacted as it is when a consumer stops paying their mortgage or other debt.

SHAHANI: Turns out, other banks agree. 2011 closed with a new trend. In 30 percent of private loan modifications, banks are doing a principle write-down. That is, hacking away at the amount owed. Two years ago, that 30 percent was just at two percent.

Laurie Goodman welcomes the shift. Her firm, Amherst Securities, sells mortgage stock securities to investors. Even though her own clients stand to lose millions, they lose millions more with foreclosures.

LAURIE GOODMAN: Most investors understand the fact that they're better off. I actually found it very, very encouraging.

SHAHANI: Encouraging, she says, because it's overdue housekeeping for America's economy. Banks clear their balance sheets, investors get a predictable stream of income, and homeowners stay homeowners, like Sharon Jordan. She's among the first participants in the Boston pilot project.

UNIDENTIFIED MAN: I'm nervous. I am. I'm nervous, but I can do this. I can do this.

SHAHANI: She's just handed in her first down payment. Aarti Shahani, NPR News.

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BLOCK: This is NPR.

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