Negotiating Principal Reduction on an Equity Line

Reluctance of Lenders

Lenders usually are reluctant to negotiate reductions in the principal balances of mortgages and equity lines for borrowers in danger of default. According to mortgage and financial information website HSH.com, lenders don't wish to reward borrowers for delinquency or encourage loan delinquency by lowering principal balances. Additionally, lenders can't ignore financial obligations to mortgage equity investors. Reducing principal balance of mortgages and equity lines effectively loses money for loan investors and in turn causes associated financial institutions to lose money.

State Foreclosure Laws

Deficiency judgments are lawsuits that compel lenders to repay the balances of home mortgages when foreclosure auctions do not bring sufficient returns for lenders. In states that don't allow deficiency judgments on home foreclosures, including Montana, Hawaii and California, borrowers have more power to negotiate reductions in principal mortgage and equity balances. When lenders are facing a loss, there's more room for borrowers to convince them that reductions in principal loan balances will make it more likely that lenders can repay the loans in full.

Countrywide Mortgages

Borrowers who hold predatory mortgages and equity lines from Countrywide Financial Corp may be eligible for principal balance reductions equal to a maximum of 95 percent of property values tied to the loans. Borrowers must reside in states that sued Countrywide for predatory lending practices, including California, Connecticut, Florida, Illinois and Texas. Borrowers also must have loans that originated between Jan. 1, 2004, and Dec. 31, 2007, to be eligible. According to Reuters, the $8.6 billion total settlement with Countrywide is the largest predatory lending lawsuit in history, with over 400,000 borrowers eligible to receive aid.

Federal Balance Reduction Plans

In 2010, the federal government stepped in to assist embattled mortgage borrowers and equity line holders who were paying on loans attached to underwater properties. According to "The Huffington Post," the federal government's mortgage assistance program provided for principal balance reductions for borrowers paying on loans valued higher than property values and also provided a means for borrowers to refinance existing private loans into loans backed by the Federal Housing Administration. "The Huffington Post" estimates 15 million borrowers across the country fall into these categories.