Underwater Mortgage Principal Forgiveness Program–Will Principal Reduction Plans Help Struggling Homeowners?

Programs for principal forgiveness on underwater home loans have been made available over the past months in the hopes of assisting homeowners who have negative equity in their mortgage. Options like the FHA short refinance program offer principal forgiveness plans and a program called the Principle Reduction Alternative program, from the Home Affordable Modification Program, may also bring lower principal options to homeowners in certain situations.

However, there have been questions as to whether principal reduction plans will help homeowners who are having trouble with an underwater mortgage. There have been numerous mortgage servicers who say that underwater homeowners typically will not benefit from a principal reduction but may need alternative options like refinancing opportunities or lower monthly payment options on their home loan.

Instances where homeowners have a particular mortgage that has caused their payments to become too burdensome as a result of a decrease in their home’s value may benefit more so from refinancing plans than from a simple principal reduction. Yet, the homeowners who have mostly called for principal reductions are those who see their home as an investment.

Accusations that home prices were inflated, which has attributed to the massive decreases in certain properties across the nation, have led many homeowners to become so frustrated that they have simply walked away from their home and defaulted on their mortgage. Understandably, an underwater mortgage is a difficult situation, but homeowners who have sought principal reductions for the simple reason that they want their home to be more profitable if they choose to sell have typically been unable to find principal forgiveness options.

There have been some financial institutions which have offered earned principal forgiveness plans, where homeowners who continue to meet their mortgage payment obligation despite having an underwater mortgage will earn a principal reduction. Yet, critics of principal reduction plans often point out that servicers must agree to lower the homeowner’s principal before these plans can be used and, since many servicers are unwilling to reduce principles, many of these plans may be unsuccessful.

While, again, there are principal reduction options available, the usefulness of these plans has been highly suspect as reductions are usually at the servicer’s discretion. Yet, homeowners who are having trouble making their mortgage payment may have refinancing opportunities through programs like the Home Affordable Refinance Program or, again, the FHA short refinance program.