FDIC Principal Reduction Program

The Federal Deposit Insurance Corporation (FDIC) plans to test mortgage principal reduction as an effective way to prevent foreclosure.

Borrowers who are significantly underwater, owing more than their house is worth, will be rewarded for staying current on their monthly payments with "earned principal forgiveness."

Being underwater is a key predictor of default. Troubled owners often believe, even if they can afford to make the payments, it will take longer for the house to regain value than for the foreclosure to come off their credit record. Major critics of the foreclosure prevention program Making Home Affordable say that the program rarely reduces the amount the borrowers owe. Until the foreclosure levels drop, rebounds in home price will likely continue to be modest.

The government continues its search for an effective method of preventing foreclosure. If this program is successful, principal reduction may become a more common way of helping troubled homeowners.

The start date has not officially been announced but it will occur this year. The pilot program only applies to loans the FDIC obtained from failed banks.

Source: The Washington Post

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