Over the last few years there has been a lot of buzz about principal reduction programs for underwater homeowners. The FHA even came out with some guidelines related to a principal reduction program in 2010. The problem was, none of the principal reduction programs announced were mandatory. That means the banks were left to voluntarily forgive debts. As you can imagine, banks were not anxious to give money away.
However, principal reductions can and do make sense in some cases for banks. For example, foreclosing on a home is a long and expensive process for a bank and in some cases a bank determines that it would be financially better off reducing the principal owed on a home and keeping the current borrower in the house than going through a long foreclosure process and then selling the bank-owned home at a steep discount. Losing $30,000 with a principal reduction is better than losing $60,000 after a long foreclosure and home sale process. Other reasons to reduce principal exist as well.
Each potential principal reduction case is unique and should be looked at individually. If you are researching a principal reduction, contact us in the form on the right to have one of our counselors look at your situation and point you in the right direction.