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It's very rare to get your principle reduced, however it can and has been done. Depending on who is negotiating the terms of the loan modification actually makes a difference.
Sometimes an attorney can get the mortgage company or lender to reduce the payment by negotiating for the payments to be made on a reduced balance, yet the borrower still owes the full balance if they were to sell the house. Sometimes the balance can be reduced permanently or temporarily, it really just depends. Their are numerous options available to home owners to afford their homes, yet sadly the lender will only give them one or two that is usually still unaffordable. To be honest, a temporary reduction in principle makes more sense financially for the bank than a foreclosure, but nothing they are doing right now makes any sense. And then they go to the government asking for a bailout when all of this could be avoided. It just doesn't make sense does it?