FDIC to Test Principal Reduction

The Federal Deposit Insurance Corporation is developing a program to test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from Foreclosure.

Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they keep up their payments on the mortgage over a long period of time. Their thought is "an earned principal forgiveness", says Shelia Bair FDIC Chair, "this would only be for homes that are significantly underwater".

This program would only be for Banks that are taken over by the FDIC and amounts to less than 1% of all mortgages.

Lenders have been reluctant to cut the principal balance of borrowers fearing that it would encourage current borrowers to become delinquent even if they can afford the payments.

This is just a limited PR stunt to me, Almost no one will qualify, and the Banks believe it or not have more of an incentive to let borrowers default, since there are shared loss agreements with the Treasury for most of the Big Banks. Again it is all about Wall Street's profits and not main streets needs.

The belief that if this were to become mainstream, millions of homeowners would default immediately. The only thing these programs, the Treasury programs, and the Obama Administration HAMP programs are going to do is delay what is going to happen anyway.