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Mortgage Principal Write-downs ? Yah or Nah

By Shelda Hodges Author & Realtor

Real Estate Agent with SANDALS REALTY GROUP, INC

December 31, 2011 03:45 AM

Mortgage Principal Write-Downs? Yah or Nah

Mortgage Principal write down

Principal reduction and/or Principal write-downs is a trending topic. lawmakers in the House of Representatives are asking that Fannie Mae and Freddie Mac reduce the mortgage principal of borrowers who owe more on their home than it is currently worth.

To Homeowners demise, the Federal Housing Finance Agency, which regulates Fannie and Freddie, has been refusing to take such a drastic move, citing concerns that writing down principal balances may create a “moral hazard” and prompt other borrowers to stop making loan payments on time. “Really” I would think this would help our economy by reducing the risk of defaults achieve better-performing loan, modifications and avoid the extreme losses of unnecessary foreclosures,". To clarify, Mortgage modifications usually involve a reduction in the interest rate but not the principal balance of the loan. Given an expanding gap between home values and mortgage balances it’s a legitimate argument for comprehensive anti-foreclosure efforts that include principal write-downs. Fannie and Freddie are also concerned that writing down loan balances would create a moral hazard -- the concept that rescue efforts breed further behavior that exacerbates the existing problem -- prompting other borrowers to stop making timely loan payments.

Maybe better guidelines for Loan origination's should be the starting point. Homeowners have taken advantage of ZERO down-payment programs, or 100% equity loans.

Principal reductions would be key/central to cleaning up the housing mess and preventing further foreclosures. Settlement talks between the government and some of the biggest mortgage servicers to clean up alleged foreclosure abuses include widespread principle reductions in their agreement. Under BofA’s plan, borrowers would have to prove financial hardship to qualify for a modification involving a reduced principal, and the original principal amount would be limited to $1 million, or lower in some geographic regions.

Who is Fannie Mae & Freddie Mac?

Fannie Mae and Freddie Mac provide guarantees to investors against the possible default of loans, which encourages banks to make new loans. The two companies are the biggest sources of U.S. mortgage financing, and regulations on their activities have a widespread effect on the mortgage market. Fannie Mae and Freddie Mac, which were taken over by the government in 2008, have together received more than $145 billion in taxpayer-funded support.

Fannie Mae and Freddie Mac, which are the largest source of mortgage funds in the United States, do not provide mortgages to home buyers. But because they buy up pools of mortgages from banks and provide guarantees to investors in mortgage-backed securities against possible defaults, the regulations on what types of mortgages they will guarantee has a widespread effect on the market for home loans.

Where does the Faith of Principal Reduction Lies………………………

Have a Blessed & Productive New Year 2012

Until 2012 PEACE OUT!