Many homeowners experience hardship and run into scenarios where they can’t afford their mortgage. Principal reductions were an option for homeowners who had negative equity (owing more on your home than what it’s worth).
Here, we’ll define principal reduction and cover its history. Since principal reduction programs have ended, we’ll also cover alternatives if you’re experiencing negative equity or having a hard time paying your mortgage.
A principal reduction lowers the total principal balance a borrower owes on their mortgage. Provided to homeowners with underwater mortgages (another term for negative equity) in the wake of the subprime mortgage crisis, principal reductions were designed to help both the borrower and lender avoid the foreclosure process.
A principal reduction was an alternative to foreclosing on a home, since no one benefits from a foreclosure. Because many people were defaulting on their loans following 2009, programs were introduced to reduce the principal owed to keep homes out of foreclosure.
Principal reductions came out of the 2008 – 2009 financial crisis caused largely by the housing bubble of subprime mortgages. These mortgages were called “subprime” because they were given to borrowers with low credit scores. It resulted in many people getting in over their heads on homes they couldn’t afford.
As people started to default on their mortgages, the growing real estate bubble burst. Housing prices plummeted, which left many people with negative equity. In response, the U.S. government created a program called the Home Affordable Modification Program (HAMP) and other principal reduction programs.
Let’s review the principal reduction programs that helped homeowners facing problems with paying their mortgage. These programs were started in the wake of the housing market crash and have since expired.
HAMP was a federal loan modification program announced after the subprime mortgage crisis in 2008 as part of the U.S. government’s Troubled Asset Relief Program (TARP). Fannie Mae and Freddie Mac joined in the second quarter of 2009 to implement HAMP.
A few of the requirements to qualify for HAMP were:
HAMP ended in 2016.
The U.S. Treasury created the Hardest Hit Fund (HHF) in 2010. It was established to provide aid to the states most affected by the subprime mortgage crisis. The HHF was available to 18 states and the District of Columbia.
Many of the states used this fund to create their own programs, like Keep Your Home California and Step Forward Michigan. Each state had their own requirements for eligibility, with a common requirement being that the home be the primary residence in the state the program was located.
In 2016 when HAMP ended, Congress increased funding to HHF, making it available through 2020.
The Principal Reduction Modification program was a one-time program announced by the Federal Housing Finance Agency (FHFA) in 2016. To qualify, borrowers had to be at least 90 days delinquent and have an unpaid principal of $250,000 or less, among other eligibility criteria.
The program was offered only to borrowers with Fannie Mae or Freddie Mac loans. It ended in October 2016.
While principal reduction programs are no longer available, general mortgage payment assistance may be. To be eligible, your property needs to be distressed or in danger of foreclosure.
Most of these programs have limits on the amount of principal you can owe and require the property to be your primary residence. If a principal reduction is an option, you need to prove you’ll be able to afford your mortgage payments with the principal reduction.
Following the ending of HAMP and the principal reduction modification in 2016 and the HHF in 2020, opportunities for principal reduction have become rarer. So, let’s go over some alternatives.
If you’re struggling with negative equity or making your monthly payments and are ineligible for or can’t find a principal reduction program, here are some other options:
Principal reduction was a tool used to help homeowners who were underwater in their mortgage and had a hard time making payments as a result of the 2008 subprime mortgage crisis. The two major federal programs, HAMP and HHF, have since ended.
However, plenty of options are still available for homeowners who have negative equity or are having trouble paying their mortgage. If you’re struggling to pay your mortgage on time, consider applying to refinance your loan today.
Victoria Araj is a Team Leader for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 19+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.
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