The Obama administration is discussing with banks a change in its foreclosure-prevention program that would encourage lenders to reduce the loan balance due in some cases, people familiar with the situation said Monday.
The move would be an attempt to address the plight of millions of households whose home values have fallen far below their mortgage debt, a condition known as being "under water."
A Treasury spokeswoman said efforts continued to aid struggling homeowners but declined to comment on any new plans.
The administration is trying to rescue several million struggling homeowners through a $50 billion program known as the Home Affordable Modification Program, or HAMP, launched a year ago.
Under HAMP, lenders get federal subsidies if they modify loans to decrease monthly mortgage-related payments to 31% of pretax income. That is done by cutting the interest rate to as low as 2%. In addition, lenders sometimes extend the term of the loan to 40 years. If those steps don't reduce the payment enough, lenders are supposed to defer principal payments.
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, HAMP doesn't bar principal forgiveness, but neither does it prod lenders to forgive principal, and in most case they refuse to do so.
There were an estimated 11.3 million U.S. households, or 24% of those with mortgages, under water at the end of 2009.