Principle Reductions for Underwater Borrowers on the Horizon?

A letter sent to the Federal Housing Finance Agency’s (FHFA) acting director Edward DeMarco by 21 member of the United States Congress urged this director to implement principle reductions on loans currently backed by Fannie Mae and Freddie Mac—2 of the largest backers of mortgage securities.

The letter explains that the members of congress do not urge that the FHFA request principal reductions out of kindness to homeowners yet support principal reductions in order to save taxpayers money for any future losses (foreclosed homes).

Principle reductions are when the financing institution reduces the amount owed against the debt in order for the homeowner to not be “underwater”.   The purpose of principle reductions is to help those that are substantially underwater or owe much more than what the asset is worth.

17% of Fannie borrowers are underwater and 18% of Freddie borrowers are underwater.  This provides a great risk of eventual default by this particular group.

Loan modifications have not solved the problem since 44% of loans modified within the past 24 months are three months past due, according to a Freddie Mac cited letter:  “The performance of the mortgage modifications leaves much to be desired for homeowners, for the housing market and for taxpayers”.

The members of Congress which urged the principle reduction stated that the short term effects of principal reductions on the books may look grim yet the long term effects greatly outweigh the money lost if homes and property continue to default on a regular basis.

Questions about principle reductions?  Call me directly at 28-869-3469. –Matt

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