Structuring loans so that homeowners don't eventually default again is an important part of successful loan modification. The tricky part is balancing that outcome with the desire of lenders to not give up too much potential return on investment. Freezing the rate on an adjustable mortgage is a no-brainer, but more drastic steps — like reducing principal balance — are still being used sparingly. JPMorgan Chases's new loan modification program, for example, can include principal reduction, but only on a temporary basis. If homeowners refinance or sell, the amount forgiven has to be paid back.
Properly lining up incentives for all the parties involved is an exceedingly difficult task. That's why the FHA's new Hope for Homeowners program has gotten off to such a slow start. Lenders aren't eager to write down the value of loans and lock in losses. Lenders that hold 2nd or 3rd liens on houses are also a perpetual — and by some accounts, growing — roadblock to renegotiating loan terms. When loan terms change, they are often the first to lose out, and are therefore the least likely to play ball.
Yet one more difficulty to overcome for anyone trying to fix the housing mess.