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Thursday, June 25, 2015

MORTGAGE PRINCIPAL REDUCTION - TO BE OR NOT?



                  PRINCIPAL REDUCTION FOR DELINQUENT HOMEOWNERS

Opponents of principal reduction say it is too costly.  Others say it would save taxpayers millions of dollars.  The issue is still being debated.  Back in February of this year, Federal Housing Finance Agency Director Mel Watt was studying the idea of reducing principal on properties with depressed values, but would like to do it without incurring costs to taxpayers.  Apparently, they don't consider that a portion of the taxpayers ARE part of the 7 million struggling (underwater) homeowners.

Three years ago FHFA's acting director Edward DeMarco barrred Fannie Mae and Freddie Mac from reducing principal for borrowers at risk of foreclosure.  His argument was that the risks would include as many as 19,000 borrowers strategically defaulting on their loans.  An Associated Press article stated that about 74,000 to 248,000 homeowners would be eligible for principal reductions from the GSEs, and that an estimated 11 million Americans owe more on their mortgages than their homes are worth.

Taxpayers have spent roughly $170 billion to rescue Fannie and Freddie.  A cost of an additional $260 billion more was projected to support them through the end of 2014, after subtracting dividend payments.  The article stated that:  "The Treasury Department said in January it would cover part of the cost if Fannie and Freddie could reduce principal when they modify mortgages for troubled borrowers.  The department said it would use unspent housing rescue money from TARP -  the $700 billion Troubled Asset Relief Program.


A Black Knight report found that if any solutions go through, delinquent underwater borrowers would require up to $89 billion.  (That works out to about $20,000 $30,000 per delinquent homeowner., I think).  According to Housing Wire. com, there are currently approximately four million borrowers in negative equity positions, representing nearly $800 billion in outstanding balances, with $157 billion of that being underwater.  For the365,000 delinquent underwater loans backed by Fannie and Freddie alone, it would require nearly $18 billion in write-downs, according to the report seen in HousingWire.com, February 5, 2015.

On June 12, 2015, Ben Lane of HousingWire.com wrote that the number of borrowers who owe more on their home than it is worth is falling, but there are still a number of borrowers who face a severely steep climb to get out from under their home (referencing a Negative Equity Report from Zillow).

[to be continued]