Fannie Mae and Freddie Mac, the two now government controlled mortgage giants were asked by the Federal Government to consider principal reductions on mortgages, as a way to assist struggling and upside down homeowners to help stabilize the housing market. After a month of deliberation, Fannie Mae and Freddie Mac announced that they would not be reducing principal balances on any mortgages.
Edward DeMarco, the agency's acting director said in a statement. The, "FHFA has concluded that the anticipated benefits do not outweigh the costs and risks."
However, soon after this release, Treasury Secretary Tim Geithner, sent an eight-page letter to DeMarco urging him to change his mind. In it, Geithner argued that allowing principal reduction would ultimately save taxpayers as much as $1 billion. "I do not believe it is the best decision for the country," Geithner wrote. "You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis."
In recent months, there has been mounting pressure to allow the Fannie Mae and Freddie Mac to reduce principal balances on mortgages.
In, fact, President Obama’s administration even offered Fannie and Freddie incentive payments of up to 63 cents per dollar of principal forgiven. Which prompted Fannie and Freddie to take another look at their analysis.
In further comments, DeMarco said that his prime directive is to minimize taxpayer bailouts of Fannie and Freddie, which have already received more than $188 billion. Reducing principal would likely increase that amount because it would lock in losses on their portfolios. Mr. DeMarco also said principal reduction would only help a maximum of 248,000 homeowners. But the companies would have to spend time and money developing and implementing such a program, which would also delay a resolution for many troubled borrowers.
Furthermore, he's also concerned that principal forgiveness could prompt many borrowers who are current with their payments to fall behind in order to prove financial hardship, one of the prerequisites for getting a loan modification. Having them default will hurt the housing market more than offering principal reduction will help it, he said.
Finally, it could hurt credit availability in the future because principal reduction would require the rewriting of a contract, which could prompt investors to shy away from mortgage-backed securities or demand higher rates in the future due to the added uncertainty.
For now, it looks like there will be no principal reductions for homeowners with Fannie Mae and Freddie Mac mortgages. It doesn’t look like this issue has gone away quite yet, but don’t expect any principal reductions in the near future.
For more information on home purchase loan or refinance programs for existing and potential home owners, please contact Bill Kamboukos of Strategic Mortgage at (480) 219-3682 or by emailing: info@strategicmtgaz.comor online at www.strategicmtgaz.com
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