Bottom line: Principal reduction is not a new idea, and it hasn’t become widespread for many reasons. Some lenders will reduce debts in some cases, and the underwater homeowner has nothing to lose by broaching the subject with the loan servicing company. But if the answer is no, don’t hold your breath waiting for an industry or government program to bail you out.
Existing programs, like the government’s Home Affordable Modification Program (HAMP), generally focus on making monthly payments more affordable, in many cases by reducing the interest rate. That makes the burden easier to bear but leaves the borrower underwater.
Most underwater homeowners therefore have only three choices. You can keep making payments in hopes that the housing market will rebound, driving your home’s value back up. You can accept the fact that your home is a money-losing investment, but keep paying because it’s where you want to live. Or you can stop making payments and let the lender take the property back, recognizing you’ll have to rent for a number of years while striving to rebuild your credit.
In most cases, it’s probably best to choose an option sooner rather than later, getting the crisis behind you as soon as possible. Waiting for a bailout is betting on a long-shot.