More Homeowners Get Mortgage Principal Reduced, but Numbers Still Small

(Wall Street Journal) -- The number of troubled U.S. homeowners who have been able to get their home-mortgage balances reduced remains small but is on the rise, according to a federal banking regulator.

More than 10,400 homeowners received principal reductions from their lenders in the first three months of the year, the Office of the Comptroller of the Currency said Wednesday in its quarterly “mortgage metrics” report. The total was up 5.4% from about 9,870 in the last quarter of 2011 and more than double around 4,800 in the first quarter of last year.

Banks are granting homeowners write-downs mainly if they hold those loans on their balance sheet. They typically do so for loans that are significantly “under water”–meaning that the homeowner owes far more on the property than the home is worth.

Banks aren’t permitted to grant principal reductions on loans sold to Fannie Mae and Freddie Mac, the federally controlled mortgage investors. The Obama administration at the start of this year offered new incentives to encourage Fannie and Freddie to allow write-downs, but their federal regulator has yet to decide whether to accept that offer.

Principal reductions made up 10.2% of all loan modifications completed in the first quarter, compared with 8.5% in the final quarter of last year and 3.0% in the first quarter of 2011, the regulator said.

Besides Fannie and Freddie, other government agencies including the Federal Housing Administration and Veterans Administration don’t grant principal write-downs.

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