According to the Wall Street Journal, the Federal government is pursuing additional measures to compel mortgage lenders to provide principal forgiveness for underwater homeowners if, after taking steps such as reducing the interest rate to as low as 2% and extending the loan term to 40 years, the homeowner still can’t handle the financial hardship:
The revision under discussion would encourage lenders in more cases to reduce the loan balance, known as principal forgiveness. That would give underwater borrowers more incentive to keep paying. Some of those borrowers now feel that they owe so much more than the values of their homes that it makes no sense to make payments.
Treasury officials and banks have long been reluctant to play up the possibility of principal forgiveness for some borrowers because that might prompt many others, including those who can easily afford their payments, to demand the same treatment. As it stand [sic], HAMP doesn’t bar principal forgiveness, but neither does it prod lenders to forgive principal, and in most case [sic] they refuse to do so.
(Yes, that’s two grammatical errors in one sentence at WSJ — we all have bad days, right?)