Mortgage Debt Relief Sighting: Regulator Loosens Stance on Principal Reductions
A measure of mortgage debt relief may be on the way for struggling U.S. homeowners.
Under pressure from Congressional Democrats, Edward DeMarco, the head of the Federal Housing Finance Agency â the top regulator of Fannie Mae and Freddie Mac, which together hold 60 percent of Americaâs home mortgages â said that offering mortgage debt relief to underwater homeowners via a reduction on their home loan principal balances may make sense after all, but that more study was needed.
DeMarco has been stubbornly against principal reductions, despite frequent calls by many Washington lawmakers to allow them. Although DeMarco’s recent comments may have opened the door to the idea of principal reductions on home mortgages, he repeated the reasons why he has been opposed the idea, including concerns over a moral dilemma in which homeowners who arenât in trouble flood lenders with demands of principal reductions (âFHFA Chief DeMarco Loosens Up a Bit on Principal Reduction,â MSNBC, April 10, 2012).
Shaun Donovan, Secretary of Housing and Urban Development, told a Senate panel earlier this year that increasing data showed that mortgage debt relief via principal reduction would be good for homeowners, investors, and communities. Principal reductions would âallow people to pay [their bills], stay in their homes and increase the value of those mortgages,â Donovan said.
Meanwhile, private lenders are offering principal reductions to their borrowers. âPrivate lenders are doing it for an increasing share of their [mortgage portfolios] when it makes sense,â said Andrew Jakabovics, a research director at Enterprise Community Partners, Inc. âIf [Fannie Mae and Freddie Mac] arenât willing to do it there are plenty of investors who are buying these notes because economically it makes a lot of sense.â
But DeMarco, thus far, hasnât been persuaded. Instead, DeMarco has said that borrowers have a moral obligation to repay their mortgages. âThe far larger group of underwater borrowers who today have remained faithful to paying their mortgage obligations are the much greater contingent risk to housing markets and to taxpayers,â DeMarco said.
As a result of DeMarcoâs position â which he holds despite the government having propped up the money-losing mortgage agencies with more than $150 billion in taxpayer funds â the FHFA has offered only interest rate deductions, loan term extensions, and principal forbearance, which postpones the repayment of a portion of a loan balance, but doesnât permanently reduce it. For his part, DeMarco cited data on Fannie Maeâs loan modifications showing that lowering monthly payments is a more effective way of preventing defaults than reducing principal balances.
Since the U.S. housing market collapse in 2006, the value of American homes has plunged $7 trillion dollars, leaving about 11 million homeowners owing more on their homes than theyâre worth.
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