Can underwater home loans be saved with principal reduction?

A fight to step up principal reduction to stem the flow of foreclosures and underwater home loans is going on in the nation’s capital. The system is strongly supported by the Obama Administration. Officials are attempting to convince Freddie Mac and Fannie Mae that their participation is crucial to its success. Even though experts say Fannie and Freddie’s participation is vital, the regulator of those agencies is barring them from participating. Resource for this article – Administration – Principal reduction keeps foreclosures in check by MoneyBlogNewz.

Cutting the foreclosure problem off

Principal reduction — reducing the amount owed on a mortgage loan — is viewed as an advantage to both borrowers and loan providers. It is expected to serve as an incentive for underwater borrowers to stay in their homes and benefit lenders more financially than they would through a foreclosure. 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. There are around 1.5 million underwater mortgages, and the government hopes to help them out by adding the principal reduction plan to the Home Affordable Modification Program.

Including Fannie and Freddie

Part of the HAMP plan offered banks that reduced principal on underwater home loans additional subsidies. 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 repayments. The success of this plan is weighed heavily on if Freddie and Fannie join in and participate or not. Fannie and Freddie combined own over fifty percent of home loans. Most banks are not participating within the principal reduction plan. Many large banks will likely participate once Fannie and Freddie are on board.

Freddie and Fannie don't play well with others

The Federal Housing Finance Agency does not support Fannie Mae and Freddie Mac participating in this plan. FHFA was accused of throwing losses Fannie and Freddie's way when the government took over mortgages back in 2008. In the past 2 years the agencies have cost United States working class individuals about $134 billion, and those losses are expected to increase. Fannie and Freddie's participation in also being pushed by the Obama Administration. Long term losses could be lowered with short term principal reduction. But the FHFA states as long as underwater borrowers keep making their payments as is, Freddie and Fannie will keep taking their money.

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/