Can underwater home loans be preserved with principal reduction?

Government policymakers are arguing about the efficacy of principal reduction as a solution to a growing number of underwater mortgages. The Obama Administration is trying to convince Fannie Mae and Freddie Mac to join a program that decreases the balance of underwater mortgage loans. Specialists say the program will not work unless Freddie and Fannie are on board, but the regulator of those agencies opposes their involvement.

Cutting the foreclosure issue off

It is good for both loan companies and borrows to cut back the amount owed on a mortgage, called principal reduction. Foreclosures benefit nobody, and if you are an underwater borrowers, this is meant to help you keep your home. Nearly 25 percent of U.S. home loans are underwater. Home values continuously dropping is causing the number of underwater home values to continue to grow. There are around 1.5 million underwater home loans, and the government hopes to help them out by adding the principal reduction plan to the Home Affordable Refinancing Program.

Fannie and Freddie need to be team participants

To jump start a sputtering HAMP program, in October the Administration started offering banks additional subsidies in return for principal reduction on underwater mortgages. 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 success of this program is weighed heavily on if Freddie and Fannie join in and participate or not. Around half of all home loans are owned by Fannie and Freddie. So far banks have been reluctant to support principal reduction. The consensus is that if Freddie and Fannie join in, the biggest banks in the U.S. will be pressured to do the exact same.

The reason why won't Freddie and Fannie play along

Fannie Mae and Freddie Mac will not join in unless the Federal Housing Finance Agency grants their approval, and they won't. When the government had to take over the mortgage giants in 2008, FHFA was charged with curbing losses at Freddie and Fannie. $134 billion and rising is the amount of money thus far the mortgage industry has costs tax payers. Fannie and Freddie's participation in also being pushed by the Obama Administration. Long term losses can be lowered with short term principal reduction. But the FHFA claims as long as underwater borrowers keep making their payments as is, Fannie and Freddie will keep taking their cash.

Articles cited

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/