Administration Hopes Principal Reduction Decreases Foreclosures

Government policymakers are arguing about the efficacy of principal reduction as a solution to a growing number of underwater mortgages. If the Obama Administration gets its way, Fannie Mae and Freddie Mac will participate in a plan that writes down underwater home loans. Financial experts have said that principal reduction will only be effective if the federal regulator of Fannie and Freddie lets the agencies purchase into the program.

Reducing the top off the foreclosure snake

Principal reduction — reducing the amount owed on a mortgage loan — is viewed as the advantage to both borrowers and loan companies. Foreclosures benefit nobody, and if you are an underwater borrowers, this is meant to help you keep your home.

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. You will find around 1.5 million underwater mortgages, and the government wants to help them out by adding the principal reduction plan to the Home Affordable Modification Program.

Principal reduction program needs Freddie and Fannie

Part of the HAMP program offered banks that reduced principal on underwater mortgages additional subsidies. For somebody to qualify they cannot be behind on their mortgage and must own more than 15 percent more than their home is worth. If Freddie and Fannie do not play nice and join this program, it probably won’t last very long. Freddie and Fannie combined own over fifty percent of home loans. Most banks are not participating within the principal reduction plan. Many big banks will likely participate once Fannie and Freddie are on board.

Freddie and Fannie do not play well with others

The Federal Housing Finance Agency doesn't support Freddie Mac and Fannie Mae participating in this program. Back in 2008 when the Government took over the mortgage industry Fannie and Freddie had been having the loses thrown at them by FHFA. In the past 2 years the agencies have cost U.S. working class individuals about $134 billion, and those losses are expected to increase. The Obama Administration is pressuring the FHFA to let Fannie and Freddie in. They say short term principal reduction will mitigate more severe long-term losses. Fannie and Freddie will continue to take underwater borrowers cash so long as they're willing to pay.

Data from

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/