Loan Modification

Byron MacLeod, a financial analyst at Gradient Analytics, said that with fewer bad loans, he would expect charge-offs to flatten out, boosting capital-reserve levels.

What's more, banks may stop posting huge provisions to their loan-loss accounts, lifting the pressure on their quarterly earnings."The growth in [nonperforming loans] up to now has been a significant concern, and the alleviation of this concern would be de-facto positive," added McLeod.

Bank of America Corp., which assumed a big chunk of mortgage loans when it bought lender Countrywide Financial, expects to modify or work out at least $40 billion of such troubled loans by the end of next year.

The nation's largest home-loan provider said that modification plans jumped 958% to more than 21,000 in June, from about 2,000 modifications in the same month last year. Since the start of the year through June, loan modifications make up more than 70% of all home-retention plans for Bank of America -- up from less than a third last year.

Wachovia Corp, smaller than B. of A. but also based in Charlotte, N.C., said that roughly $1.5 billion out of its $7 billion of nonperforming assets are modified loans.The large chunk of modified loans on banks' books these days is nothing new. But Wachovia recently provided a glimpse of how these loans actually are performing, putting the glass half-full.

"Our experience has been reasonably good in that 50% of these modified loans remain current with their modified terms after about six months," said its chief risk officer, Donald Truslow, who will retire once a successor is named.