Due to the extremely high number of Americans who are on the verge of losing their homes, the government has established a special program to ease the pain. The Home Affordable Modification Program established laws that help people avoid foreclosure and stay in their home. It is expected to aid at least 4 million Americans who are in financial trouble.
There are several provisions to the program. Those who are unemployed will receive job counseling to help them find work. Lenders will receive incentives for modifying the terms of a loan to help the home owner keep the house. As a last resort, the program will help owners sell their current home and find one that is more affordable.
The net present value or NPV for short is used to determine the profitability of a loan. Lenders can use what is called an alternative NPV if it is higher than that of the present value. Therefore they must consider if a principal write down will be offset by government subsidies. They are not forced to to modify the loan, but in many cases they find that it will be more profitable to take the subsidies instead of risking a default on the loan.
One of the biggest causes of the current problems was the runaway principal rates owed on houses. Once home values began to fall, many homeowners found the principal owed on the mortgage to exceed the home's value. It is almost impossible to recover when one finds themselves in this situation. Often the only recourse is to walk away from the home and thus the mortgage. This leaves the bank holding the loan as well as a vastly undervalued house. They don't want this. By writing down the principal, they give homeowners an alternative to foreclosure or default.
If you think your situation might be helped by this program, you should write a letter to your lender telling them your situation and what could help. You'll need to provide a detailed description of your current financial situation, just like when you took out the mortgage. The lender will review your request and determine what will best suit their needs. If you are lucky, you will both come out in a better situation.