Principle Reduction for Mortgage Loans

A recent Wall Street Journal article discusses the ongoing conflict regarding principle reduction for mortgage loans.  As the article stresses, Fannie Mae/Freddie Mac—two of the largest holders of mortgage loans in the United States—usually do not permit principle reductions of loans (where the lender forgoes a portion of the unpaid debt).  Most loan modification programs, both government based and private, generally do not allow for a principle reduction; while the lender will “forbear” the unpaid debt (usually in a balloon payment at the end of the loan), the debt does not go away.  This reality is something I stress to each of my clients: while I always aim for a loan modification with principle reduction, it is never a guarantee.