Can underwater mortgages be preserved with principal reduction?

A struggle over principal reduction as a way to keep underwater mortgages and foreclosures from increasing is being waged in Washington. If the Obama Administration gets its way, Fannie Mae and Freddie Mac will participate in a program that writes down underwater home loans. Experts say the plan won’t work unless Freddie and Fannie are on board, but the regulator of those agencies opposes their involvement.

Stemming a rising tide of foreclosures

Principal reduction — reducing the amount owed on a mortgage loan — is viewed as an advantage to both borrowers and loan companies. It is expected to serve as an incentive for underwater borrowers to stay in their homes and benefit lenders more financially than they would through a foreclosure. Currently a quarter of all home loans are underwater. Home values continuously dropping is causing the number of underwater home values to continue to grow. Government officials have estimated that up to 1.5 million underwater home loans could possibly be saved from default by principal reduction, which was recently added to the underperforming Home Affordable Refinancing System.

Freddie and Fannie have to be a part of this plan

Part of the HAMP system offered banks that reduced principal on underwater mortgages additional subsidies. Qualifying borrows have to owe more than 15 percent than what their home is worth and have to be up-do-date on their mortgage payments. The Administration and bankers agree that without Fannie Mae and Freddie Mac going together, the plan is unlikely to work. Around half of all home loans are owned by Fannie and Freddie. Most banks are not participating in the principal reduction plan. The consensus is that if Fannie and Freddie join in, the biggest banks within the United States could be pressured to do the exact same.

The reason why Fannie and Freddie won’t perform

Fannie Mae and Freddie Mac have stayed on the sidelines since the regulator of the agencies, the Federal Housing Finance Agency, opposes their participation. Back in 2008 when the Government took over the mortgage industry Fannie and Freddie had been having the loses thrown at them by FHFA. Tax payers have already paid $134 billion to mortgage programs because of Fannie and Freddie, and that number is only going to grow. Fannie and Freddie's participation in also being pushed by the Obama Administration. They say short term principal reduction will mitigate more severe long-term losses. Fannie and Freddie will continue to take underwater borrowers money so long as they are willing to pay.

Citations

Pro Publica

propublica.org/article/fannie-and-freddies-govt-regulator-opposes-reducing-mortgages-for-strugglin

Wall Street Journal

online.wsj.com/article/SB10001424052748703963704576005990436624546.html

Mortgage11.com

mortgage11.com/2010/12/hamp-loan-modification-help-to-know-more-on-principal-reduction-for-underwater-homeowners/