JPMorgan Chase is working on in-house, targeted principal reduction programs but has strong reservations about the government's efforts to develop a large-scale, broad-based principal reduction program for first and second mortgages.

"We know this will be surprising to some, but we have found that [interest] rate reductions and term extensions-not principal reductions-have the largest impact in achieving payment affordability and result in more modifications," said David Lowman, chief executive of Chase Home Lending.

In testifying before the House Financial Services Committee, Lowman said Chase is using principal reductions to refinance conventional borrowers into Federal Housing Administration (FHA) loans.

This summer, Chase will offer delinquent borrowers an option to refinance through the FHA's Hope for Homeowners program if they need a principal reduction or a second lien extinguished.

Chase also is developing a principal reduction program for certain payment-option ARM borrowers and conducting targeted tests to see if principal reduction is effective for "other high-risk borrowers," Lowman said. "Once we observe the results of these tests, we will be able to better evaluate the effectiveness of a broader principal reduction program."

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