Does mortgage principal reduction work?

by 09 Apr 2012

(CNNMoney) -- The world will only have to wait a few more weeks to find out whether Fannie Mae and Freddie Mac will allow principal reductions on mortgages they back.

The Federal Housing Finance Agency will decide this month whether Fannie and Freddie should allow write downs on the balances of borrowers who owe more than their homes are worth, said Ed DeMarco, acting director for the agency.

Fannie and Freddie have been at the center of a tug-of-war over fixing the housing market. They have long resisted calls to write down the balances on the loans in their portfolio, saying it would be too costly for taxpayers.

But the pressure has been building, especially in the wake of the $26 billion mortgage settlement that will reduce principal for 1 million borrowers whose loans aren't backed by Fannie and Freddie.

The agency, which regulates the government-controlled companies, had decided against allowing principal reduction after internal studies showed that alternatives such as adjusting monthly payments or forbearing principal were more cost effective.

DeMarco has said his agency is charged with protecting taxpayers' interests, and principal reduction would amount to an expensive taxpayer bailout of troubled homeowners.

Since then, however, the Obama administration has sweetened the pot. It tripled the incentives it will pay to Fannie and Freddie for reducing principal under the Home Affordable Mortgage Program, or HAMP. This has prompted the agency and the companies to redo their analysis.

But will it even matter if Fannie and Freddie start allowing principal reduction?

How many are eligible?

Together, Fannie and Freddie have about 3 million loans that are seriously underwater, according to company filings. But three-quarters of these homeowners are current on their payments and may not qualify.

"These borrowers are demonstrating a continued willingness to meet their mortgage obligations," said DeMarco in a recent speech. "This should be recognized and encouraged, not dampened with incentives for people to not continue paying."

In the end, the number of eligible underwater Fannie and Freddie loans could range from a few hundred thousand up to 750,000, according to estimates. That's not that much considering there are 11 million underwater borrowers in the U.S., just over a quarter of whom are behind in their payments.

Read ful article from CNN Money


  • by Jerry Carll | 4/9/2012 6:52:13 PM

    Not reducing principals because it will be "too costly for taxpayers" is the most ridiculous pile of propaganda I've seen yet! Tax payers have not lent money to anyone. We have no control over what giveaway programs use our tax payer money for because after we pay it, it belongs to the government to waste. These reasons why Freddie and Fannie aren't doing principal reductions are insane. Their set up to make the people think that it is their problem to not do principal reductions when all along it is the their government who created problem. Get that decision out of the insano think tanks and just simply look at how it will affect the tax payers. Is it the greatest good for the greatest number of people?
    Let's see, it will put more money in their pockets; it will allow them to keep their homes after the government namely Barney Frank and his cohorts created the Option Arm mortgages and crashed the economy; it will allow the tax payers to recoup some of their equity in their homes which is one of the reasons they bought a home in the first place; it will end the foreclosing real estate problem the government created by allowing people who could NEVER afford a home to buy one for a short time until the time bomb of market rates caught up with them in 4 years, ALL to increase votes for the government idiots who created that mortgage; JUST FOR VOTES!! SO THE NON PRODUCERS COULD KEEP THOSE IDIOTS IN OFFICE!!!
    And then when the people start to find out what these congressmen AND WOMEN did, the congressmen and women start to encroach on our Constitutional rights so that the people can't be affective at communicating those criminal acts to others and blame everyone under the sun for the devastating damage the government did to the hard working productive tax paying people of this country.
    I frankly believe that all of the government officials who created this situation and their hidden backers are guilty of treason and should be locked up or thrown out of Congress without a pension.
    Millions have lost their homes and businesses and jobs ONLY because of those governmental people.
    It's time the government and Fannie and Freddie took responsibility for the chaos and absolute devastation they have allowed to occur with the financial institutions of this country and the world and reduced the principals of homeowner mortgages SIGNIFICANTLY right now and makes things right.
    Then I think that amortized mortgages as we see them today should be outlawed. Home buyers pay multiple times the value of their homes with these mortgages as they are structured and don't need to do that.
    A mortgage should not generate more principal for the lender than the principal amount of the Note. the interest portion of the payment should go down with each payment of partial principal. Make the mortgages sane. Leave more money in the economy for businesses and jobs and allow home buyers to own their properties free and clear as soon as possible. That is the American Dream. Anything else is a lie.

  • by Dennis Wilson | 4/11/2012 9:48:49 AM

    Principal reduction programs needs to be open up to Super Jumbo mortgages above $1,000,000 plus as well!

  • by Dennis Wilson | 4/11/2012 9:53:18 AM

    Principal Reduction programs should be open to Super Jumbo mortgages over 1 Million and up! It's amazing how many high homes that are under water and need help as well !


Is TILA-RESPA a good or bad thing long term?