Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

Full Bio →

Written by

Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

Full Bio →

Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Apr 30, 2012

Advertiser Disclosure

Advertiser Disclosure: We strive to help you make confident loan decisions. Comparison shopping should be easy. We are not affiliated with any one loan provider and cannot guarantee quotes from any single provider. Our partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about loans. Our goal is to be an objective, third-party resource for everything loan related. We update our site regularly, and all content is reviewed by experts.

Principal reductions, sometimes referred to as “cramdowns,” occur when a lender reduces a home mortgage loan’s principal to the appraised value of the securing property.

These somewhat mythical opportunities are what consumer advocates have been pleading banks and leading lenders to grant borrowers for years now. But unfortunately for struggling homeowners, lenders have been reluctant to do so.

When the 2008 housing collapse occurred, millions of homeowners saw their property values decline. Those declines were so intense, that the owners’ mortgage loans became more expensive than the total value of their securing pieces of real estate. This unfortunate financial situation became known as having an upside-down mortgage loan, or an underwater property.

The only way to lift a property out from the “underwater” depths is to either increase the property’s value or reduce the mortgage loan’s principal that was used to purchase the property. If the property’s financing is reduced to be equal with the property’s appraised value, then the property will no longer be underwater and the owner will no longer have an upside-down loan.

The best way for borrowers to avoid negative equity, despite the ups and downs of the economy, is to offer a large down payment and to only financing a mortgage loan that they can afford.

So why exactly don’t lenders hand out mortgage loan principal reductions? There may not be one correct answer to that question, but some speculate lenders’ fear of creating a precedent that millions of underwater homeowners would want to cash in on.

If lenders begin reducing the principal on properties for some borrowers but not others, there will be an endless supply of lawsuits filed against those lenders. But if principal reductions are given to everybody, millions and millions of homeowners will reduce their loans, and lenders will lose billions of dollars.

That’s billions of dollars that they’ve already lent out to homeowners, and billions of dollars they can’t exist without.

The burden would ultimately fall on the taxpayers to bail these banks out (yet again), or risk losing our largest financial institutions all together.

Until the government or our private lending institutions can devise a way to effectively grant principal reductions or actual and useful refinancing opportunities, our nation’s struggling mortgage loan borrowers will be forced to fight through this rising sea of negative equity.