Prior to the Obama administration’s unveiling of the “Homeowner Affordability and Stability Program” (HASP), principle reductions were considered to be somewhat like the pot of gold at the end of the rainbow - an elusive dream, much talked about but never actually seen. For all the attention on the subject, principle reductions were very rare, having occurred in only about 5% of completed loan modifications. Of these, the majority of the principle reductions that did occur were granted in cases where homeowners were under water by hundreds of thousands of dollars. Now, with the HASP initiative in force, a new type of principle reduction will be available to millions of homeowners that participate and complete loan modifications on their primary residence. The principle reductions are guaranteed by the federal government and will be paid to homeowners who make their modified payments on time for at least one year. For up to five years, homeowners who pay on time will have the principle on their mortgage reduced by $1,000 per year. The HASP initiative could also make larger principle reductions more common as lenders incorporate the reductions in to the new formula requiring limitations on the size of a homeowner’s monthly mortgage payment. Starting with FNMA and FHLMC the program will spread out to lenders across the country. Participation by lenders is optional with the exception of those institutions that have accepted funds under the Financial Stability Act, also known as the bank bailout. For them, participation in the HASP initiative is mandatory. Under the new requirements, lenders will have to limit mortgage payments to a maximum of 31% of the household’s verified monthly gross income. Factors in the mortgage payment reduction formula can include: Interest rate cuts to a floor of 2% Extension of mortgage terms out to a maximum of 40 years Forbearance of principle in to a balloon payment due upon maturity date, sale of the property, or payoff of the loan. Principle reduction to 90% of the home’s appraised value