The Federal Deposit Insurance Corp. is experimenting with a plan to help underwater home owners by reducing principal as long as they continue to pay their mortgages for an as-yet-undetermined period of time.

We're thinking about it in terms of earned principal forgiveness. If you stay current on your mortgage, you would earn a principal reduction. It would only be for loans significantly underwater, says FDIC Chair Sheila C. Bair.

The initiative would be very limited in scope and would be launched later this year.

Lender Wells Fargo also has been carefully experimenting with principal reductions on a limited basis. I do not believe that you can do a programmatic-wide or country-wide principal forgiveness [program]. You end up with many problems if you try to do this across the board, says Mike Heid, co-president of Wells Fargo Home Mortgage.

Source: Washington Post, Renae Merle