On the House: Slowing mortgage defaults | Philadelphia Inquirer | 02/06/2011: "To lower the re-default rate, the government finally came up with a principal-reduction program last year.
If the current value of a property with a loan being modified under the program is more than the balance owed - known as being 'underwater' - servicers are encouraged to offer the borrower a chance to reduce the principal, as well as the opportunity to refinance the mortgage at a lower rate.
But there is a problem here, too: a big chunk of the 23 percent of the nation's underwater mortgages are in the portfolios of Fannie Mae and Freddie Mac, and they are not covered by the program. Many experts believe Fannie and Freddie's losses would increase by $134 billion if those loans were included.
Two researchers, Brent Ambrose of Penn State and Richard Buttimer of the University of North Carolina, have proposed a way to avoid future problems: a new type of mortgage contract that automatically resets the balance and the monthly payment based on the home's market value.
This 'adjustable-balance mortgage' reduces the economic incentive to default but costs about the same as a typical fixed-rate loan, Ambrose and Buttimer say."
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