By John Wasik
(Reuters) – You’re underwater on your mortgage and falling behind on payments. You may lose your home. Can you negotiate with your lender to reduce your principal?
Increasingly, the answer is yes, although still only in rare cases.
In what could become a national policy to stem foreclosures, principal reduction is a strategy you should pursue if your lender is open to the idea. It could also give a boost to the U.S. home market, which saw a spurt in existing home sales in December. (link.reuters.com/xap26s)
The potential number of homeowners who could be helped by this strategy is huge: About one in five mortgages are currently underwater, representing about $700 billion in negative equity, the Federal Reserve estimates. Many of those homeowners go into “strategic default” and foreclosure because it makes little or no economic sense to pay on a mortgage that’s worth more than their home. Up to 1 million of these homeowners may be allowed to do principal writedowns if state attorneys general reach a settlement with banks over questionable foreclosure practices, said Shaun Donovan, U.S. Housing and Urban Development secretary. (link.reuters.com/vun26s)
The idea of principal reduction to save homeowners from foreclosure is rapidly gaining traction across the country. Bank of America has entered into a pilot program with the Boston non-profit Boston Community Capital to reduce the amount borrowers owe. Trial programs are also under way in Arizona, California and Nevada.
Even the Federal Reserve is endorsing the idea.(link.reuters.com/fak85s)
A CUSHION AND COMMON SENSE
When some $7 trillion in household wealth evaporated in the housing bust, the general economy went down with it – and will stay depressed until Americans have more of a home ownership cushion.