Fannie, Freddie regulator still pushing back on principal reductions

by 10 Apr 2012

(CNNMoney) -- Allowing Fannie Mae and Freddie Mac to offer principal reductions may save taxpayers money thanks to enhanced government incentives, a preliminary analysis released Tuesday shows.

But that doesn't mean their regulator, Ed DeMarco of the Federal Housing Finance Agency, is warming up to the idea.

DeMarco is facing tremendous pressure to allow the government-controlled mortgage titans to allow principal reduction on the mortgages they back. Some advocates say the best way to stabilize the housing market is to lower the balances for borrowers who owe more than their homes are worth.

DeMarco, however, has steadfastly resisted it, saying previous studies showed principal reduction would be too costly.

The Obama administration sweetened the pot earlier this year by tripling the incentive payments for Fannie and Freddie if they forgive principal. This prompted the firms to take another look at their analysis.

Turns out the increased incentives would make it more beneficial for Fannie and Freddie to offer principal reduction to homeowners who are deeply underwater and behind in their payments.

The $26 billion crapshoot

But DeMarco isn't backing down just yet. Speaking at the Brookings Institution Tuesday, he brought up several other concerns and costs to principal reduction.

His primary worry is that providing principal forgiveness could prompt many of the 2 million borrowers who are current with their payments to fall behind. Having them default will hurt the housing market more than offering principal reduction will help it, he said.

Read full article from CNN Money

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