Principal reduction is the process wherein the lender agrees to take less than the borrower’s full obligation to the lender on a permanent basis. Principal reduction is extremely rare. It is generally limited to second mortgages or circumstances where the value of the house is far below the size of the mortgage. Lenders rarely if ever forgive principal on defaulted first mortgages in Connecticut. Principal reduction is most likely to occur where the borrower can make a substantial cash payment in exchange for a release of a second mortgage. Homeowners in trouble rarely have the cash available for this option, nor would they be well-served to utilize such an option.
Principal reduction is generally reserved to circumstances that involve government assistance to the lender and a secondary benefit to the borrower.
Most modifications do not come in the form of principal reduction of troubled residential mortgages and an insistence on this type of relief by the borrower is likely to undermine the entire mortgage modification process.
Principal reduction rarely if ever saves homeowners in trouble.