Mortgage giants Fannie Mae and Freddie Mac are reportedly considering reducing the amount of principal that struggling mortgage holders owe in an effort to stave off foreclosures and keep people in their homes.
A joint report by NPR and ProPublica says Fannie and Freddie are considering principal write-downs because, in many cases, the move would be good for both homeowners and the massive companies.
Essentially, the worry is that underwater homeowners have much more incentive to walk away. Forgiving a portion of what they owe can do a lot to keep them in their homes and paying their mortgages rather than forcing lenders to initiate costly foreclosure proceedings.
A principal-reduction program could help as many as half a million homeowners, which could be enough to prod the housing market toward a recovery, according to the report.
But support for the idea is far from unanimous. Opponents of principal reductions worry that they rely too much on government reimbursement, and that allowing such a program would prompt a flood of fraudulent claims, the report says.
The Obama administration recently boosted government incentives for principal write-downs, and may reimburse up to half of a principal reduction, according to the report. So the move now looks more attractive, and private lenders are already increasing their use of write-downs, according to the report.
Furthermore, there are worries that some homeowners will engage in “strategic defaults,” where they don’t need assistance but simply look to grab a handout.
As delinquencies and foreclosures increase in the areas surrounding New York City, Fannie and Freddie’s willingness to work with homeowners could have a major impact on area prices. More foreclosures mean lower prices and a slower slog to recovery.
Underwater mortgage holders may also find hope in Bank of America Corp.’s just-announced pilot program offering property owners facing foreclosure the option to continue living in their homes as renters.
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