Some "Chatter" on Mortgage Principal Reduction

The Washington Post reports today that the FDIC is developing a program to test whether principal reduction on "underwater" mortgage balances owed by distressed homeowners "is an effective method for saving homeowners from foreclosure." The program would reportedly only apply to loans acquired by the FDIC from a failed bank, which would amount to less than one percent of outstanding mortgage.

But the Washington Post notes that this "effort adds to the growing debate about whether principal reductions should become a large part of mortgage-relief efforts." Apparently, some in the mortgage industry have recently become more willing to grant principal reductions. It is reported that during the third quarter of 2009, thirteen percent of mortgage modifications included a reduction in principal. It is also reported that Wells Fargo has increasingly used principal reductions with option ARM mortgages, which it primarily acquired from Wachovia in 2008.