Mortgage Principal Reductions Unlikely

It is being reported today that the Federal Reserve Chairman is calling on lenders to help homeowners facing foreclosure by having them agree to more favorable loan modifications, including reductions in principal. While lenders have sometimes agreed to rate modifications or to revised payment terms, reductions in principal are very rare. I would not expect any lender to voluntarily agree to reduce a principal balance on a loan and will be shocked if any do. They can sometimes justify this in the context of the short sale because the lender is receiving a lump sum in that situation and will be able to remove a non-performing loan from it’s books. There is no similar economic justification for a lender who will have to continue to monitor what it considers to be a risky loan. There seems to be a lot of talk in Washington about helping homeowners but little real new help. Chapter 13 remains the main option for many in the current environment.