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Fannie, Freddie To Cut Mortgage Balances For Underwater Homeowners

Written by Paul Esajian

Homeowners upside on their home purchase loan could be in line for some good news in coming weeks.

Under a plan approved by the federal regulator of mortgage-finance companies Fannie Mae and Freddie Mac, thousands of underwater homeowners — those who owe more than their homes are worth and are behind payments — could become eligible to have their mortgage balances cut, according to Wall Street Journal staffer Joe Light.  

Light wrote: “Fannie and Free — which don’t make mortgages but rather buy them from lenders and wrap them into guaranteed securities — would also forgive principal only in cases where they determine the companies would lose less money with that option than foreclosure or other foreclosure-prevention methods.

“In addition, the new program will likely be limited to mortgages whose outstanding principal balance is under a certain dollar amount, people familiar with the matter said.”

As it stands now, fewer than 50,000 underwater homeowners will be eligible for the new plan. According to CoreLogic, a real estate data firm, there were approximately 4.3 million underwater borrowers at the end of 2015.

While policymakers in the the past argued over reducing the principal of mortgages backed by Fannie and Freddie, many believe the plan’s restrictions won’t have a significant impact on the national housing market.

“It makes economic sense to do for everyone involved” said Mark Zandi, chief economist for Moody’s Analytics. “It will keep some stressed homeowners in their homes, reduce losses to Fannie, Freddie and thus taxpayers, and could if focused, buoy some hard pressed neighborhoods.”

Critics, however, argue that program would give the wrong impression to future homebuyers that such steps would be used in future crisis scenarios, including a moral hazard of forgiving debt for some homeowners and not others.

“Is the role of Fannie and Freddie to make sure your house doesn’t decline in value? I don’t remember seeing that in the charter,” said Mark calabria, director of financial regulation studies at the libertarian Cato Institute.

Former FHFA director Edward DeMarco, who is now a fellow at the Milken Institute, said in 2012 there are more effective ways to avoid foreclosure than principal reduction, stating that most borrowers still paid their mortgages and “we didn’t want to create an incentive for them not to be current.”

According to Light, Fannie and Freddie would forgive principal only in cases in which they determine they would lose less money with that option than with other foreclosure-prevention methods.

The approved plan is expected to be announced within a few weeks. What are your thoughts on the approved mortgage cuts?