A fight to step up principal reduction to stem the flow of foreclosures and underwater mortgages is going on within the nation’s capital. If the Obama Administration gets its way, Freddie Mac and Fannie Mae will participate in a system that writes down underwater mortgages. Experts say the plan will not work unless Freddie and Fannie are on board, but the regulator of those agencies opposes their involvement.
Cutting the foreclosure issue off
Principal reduction is the process of reducing what one owes on their mortgage. This is good for both the lender and the borrower. 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 hopes to help them out by adding the principal reduction plan to the Home Affordable Refinancing Program.
Principal reduction plan needs Freddie and Fannie
Banks were being offered additional subsidies in return for principal reduction on underwater home loans as part of the HAMP plan. For somebody to qualify they can’t be behind on their mortgage and must own more than 15 percent more than their home is worth. If Fannie and Freddie do not play nice and join this system, it probably will not last very long. Fannie and Freddie combined own over fifty percent of home loans. 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. could be pressured to do the very same.
Freddie and Fannie opt out
The Federal Housing Finance Agency doesn’t support Fannie Mae and Freddie Mac participating in this plan. Back in 2008 when the Government took over the mortgage industry Fannie and Freddie had been having the loses thrown at them by FHFA. Tax payers have already paid $134 billion to mortgage programs due to Fannie and Freddie, and that number is only going to grow. 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 says as long as underwater borrowers keep making their payments as is, Freddie and Fannie will keep taking their cash.
Citations
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/
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