Finally Moving Toward Principal Reduction?

The Wall Street Journal is reporting that the Obama administration is now considering, in some cases, encouraging banks to reduce loan principal as a means of keeping homeowners in their homes.

The consideration would be part of the Making Home Affordable program, whose Home Affordable Modification Program has received lukewarm reviews, due to the relatively low number of homeowners who have been able to graduate out of the trial modification stage and secure permanent loan modification.

Since the program was launched in February 2009, housing advocates said the program, while potentially beneficial for homeowners with rising mortgage interest rates, did not necessarily address homeowners who have lost their jobs. Principal reduction, they said, was the key. Rooflines recently reported on on a glimpse of consideration coming from the administration, when John Trasvina, deputy HUD secretary for Fair Housing and Equal Opportunity suggested that the administration was weighing several options when it came to changes to Making Home Affordable. Trasvina made his remarks earlier this month at the National Community Reinvestment Coalition’s 2010 National Convention.

According to The Journal:

The revision under discussion would encourage lenders in more cases to reduce the loan balance, known as principal forgiveness. That would give underwater borrowers more incentive to keep paying. Some of those borrowers now feel that they owe so much more than the values of their homes that it makes no sense to make payments.

The reports goes on to point to the reluctance of lenders to engage in principal forgiveness because it “might prompt many others, including those who can easily afford their payments, to demand the same treatment.”

Roughly 11.3 million U.S. households, or 24 percent of those with mortgages, were under water at the end of 2009, The Journal reports.

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