Mortgage Principal Reductions From The Hardest Hit Fund And HAMP–Will Principal Forgiveness Correct Negative Equity Problems?

Mortgage principal reduction plans have been offered through the Hardest Hit Fund and the Making Home Affordable Program, but there have been arguments that reducing a homeowner’s mortgage principal isn’t the best way to address negative equity issues that may arise in the lives of homeowners who are seeing reductions their property values across the nation.  However, there are still options that homeowners may be able to use, in terms of mortgage principal reductions, that could be beneficial for those in a negative equity situation who are also suffering from financial troubles that may be the cause of an inability to meet monthly mortgage payments.


While, again, various state housing agencies have been implementing the HHF program as an alternative to foreclosure prevention and mortgage assistance plans like modifications, according to a recent report by, Ally Financial is yet another lender to enter into the Hardest Hit Fund, as they will be a part of the Michigan State Housing Development Authority and will work to provide home loan modifications and principal reductions to homeowners in this particularly hard-hit state. However, numerous principal reduction plans have come from not only this particular program but initiatives like the Home Affordable Refinance Program as well.


There have been issues facing underwater homeowners, like the hesitation on the part of major financial institutions to offer principal reductions, but even in cases where a homeowner has been offered assistance through one of these programs, and there are also plans like the FHA’s Short Refinance Program that are hoped to bring about further principal reduction options in the coming months, there are still issues where many servicers either feel that these plans are not truly helpful for the housing market and as a result there have been some programs slow to get started.


As an example, the FHA’s Short Refinance Program would allow for homeowners to have a principal reduction offered by their servicer and then refinance to a more affordable home loan, but despite being set in place since the latter part of 2010, the program’s slow beginnings have many of the mind that it will be unhelpful. Yet, these initiatives either as part of state-specific programs, the FHA, or even HAMP are still a debated issue as some officials feel that principle reductions can be helpful, while others believe them to be more cumbersome and may not help homeowners with affordability.


Arguments for principal reductions are usually centered around the fact that homeowners may avoid strategically defaulting and walking away from their home, and in instances where a principal reduction could lead to more affordability on a homeowner’s mortgage payment, this could keep these individuals from either defaulting or facing foreclosure. Also, if this were the case, investors may lose less money if a principal reduction allows a borrower to find more stability and remain current on their home loan payments, but others argue that there are other issues in place that need to be considered about principal forgiveness.

Obviously, there are arguments that homeowners were never guaranteed a particular home value and devaluation was a known possibility, but there are also some individuals who are in such a severe position of negative equity that the principal forgiveness could be quite substantial for a servicer. Yet, these principal reduction plans currently in place are the only options many homeowners face and if homeowners are struggling with negative equity, consulting representatives from the FHA or HAMP could be beneficial, but state housing initiatives have also provided principal forgiveness that many homeowners need.