Principal Reduction Alternative For Negative Equity–Can Principal Forgiveness Plans Prevent Foreclosure?

Various principal reduction plans have been proposed and, in limited instances, implemented by financial institutions as a way to offer more affordability to homeowners who are in a severe negative equity situation. As part of the home loan modification program, the Principal Reduction Alternative plan is an option which servicers may use to lower the principal amount a homeowner owes through various principal forgiveness initiatives, but there have been few servicers who feel that lowering a homeowner’s principal will provide overall affordability when it comes to preventing foreclosure.

There are options, like the Home Affordable Refinance Program and the Principal Reduction Alternative plan which are in place for servicers to use, but many banks feel that reducing a homeowner’s principal will do little to help when it comes to bringing about a lower monthly mortgage payment. Rather, home loan modifications or refinancing options may be better suited to address the affordability that homeowners seek, but there are still questions as to whether homeowners in a severe negative equity situation will continue to pay on a home where they owe a substantial amount more than it’s actually worth.

Obviously, short sales and a deed in lieu of foreclosure plans are one way that underwater homeowners have been able to escape their predicament, but homeowners who view their home as an investment have grown so frustrated in the past that they simply walked away without a second thought. Yet, there have been reports that indicate home prices may continue to fall in 2011 as access to credit remains tight in some areas, the inventory of homes simply sitting empty is on the rise, and extended unemployment and uncertainty in the housing market has not prompted potential homeowners to enter the housing market and purchase a home.

Worries over continued drops in home prices and low numbers of homebuyers could delay recovery in the housing market in some areas, but there is still a divided opinion on principal reductions as, there are homeowners who are in an underwater situation but are able to make the mortgage payment and as a result did not qualify for many home loan assistance plans. While there are banks like Bank of America that offer earned principal forgiveness plans, for those homeowners who can make their underwater home loan payment and continue to do so; if housing prices remain low or drop further, this could create more apathy on the part of homeowners when it comes to remaining loyal to their mortgage obligation.

Yet, for homeowners in a negative equity situation who are struggling to make ends meet, there are affordability options through modifications, refinancing, and alternative programs like those from the Hardest Hit Program to address underwater home loan issues that may be causing distress in the lives of many homeowners. While there are those who feel principal reductions need to be more heavily addressed and even used in the coming months, there are still ways for homeowners simply looking to keep a roof over their head to achieve this goal despite owing more on their home than it’s worth.