The Principal Reduction Alternative Plan–Will It Prevent Redefaulting And Stop Strategic Defaults?

Principal reductions have been proposed as a way to help homeowners with an underwater mortgage avoid defaulting on their home loan and there have been some financial institutions who have offered principal reductions as a way to stop homeowners from walking away from their home. However, there are some indications, and statements from certain financial institutions, which point to the fact that certain mortgage servicers do not believe principal reductions help with the affordability of an underwater home loan.

Yet, the Principal Reduction Alternatives Program, which is part of the Making Home Affordable Program, is requiring mortgage servicers to evaluate homeowners who have negative equity in their home and determine if a principal reduction would be beneficial when it comes to making a home loan payment more affordable.

Homeowners who are offered mortgage assistance through programs like the home loan modification plan may have difficulty in certain situations, especially those who have adjustable-rate mortgages, but these principal reductions could be helpful in preventing redefaults for homeowners who cannot meet their mortgage payment. While servicers are being asked to consider homeowners with an underwater mortgage for principal reduction programs, they will be at a servicer’s discretion and, for this reason, many feel that homeowners may not find the principal forgiveness they seek.

However, there are some financial institutions who may offer principal forgiveness over a period of time as part of a home loan modification. Homeowners who may have a severe negative equity problem but qualify for a home loan modification may see their mortgage principal forgiven if they make timely payments within their mortgage assistance program.

While there are numerous homeowners who have simply given up on their mortgage situation and walked away, homeowners who are having trouble making payments and defaulting on their home, even when an assistance plan offered, may benefit if an underwater mortgage is the source of their problems. Obviously, principal forgiveness programs are no guarantee and may not be offered to all homeowners, but homeowners may inquire with their mortgage servicer about whether they can qualify for a principal forgiveness alternative or earned principal forgiveness program as part of their home loan modification agreement.