So This Is Why Principal Reductions Have Been Hard to Getby Tim Manni
Many borrowers aren’t qualifying for loan modifications. Even for the lucky ones who get approved, large percentages are redefaulting after only a short period. Why? The current strategies for modifying loans — extending the loan balance, reducing the interest rate and swapping out loan products — aren’t getting the job done.
The lack of permanent modifications has prompted cries for lenders to begin reducing the principal on troubled loans. While certainly controversial, underwater borrowers remain as the ball and chain around housing recovery’s ankle. That said, underwater borrowers haven’t had an easy go at getting their loan balances reduced.
According to CNNMoney.com, the reason why principal reductions have been so hard to get is because Fannie Mae and Freddie Mac have not been granting them:
Pressure is mounting on loan servicers and investors to reduce troubled homeowners’ loan balances…but the two largest owners of mortgages aren’t getting the message.
Fannie Mae and Freddie Mac, which are controlled by the federal government, do not lower the principal on the loans they back, instead opting for interest rate reductions and term extensions when modifying loans.
Fannie and Freddie’s Balancing Act
Both Fannie Mae and Freddie Mac are hemorrhaging cash. Just this week, the GSEs had to go back to Washington to ask for even more money:
If Fannie and Freddie lower homeowners’ loan balances, they are locking in losses because they have to write down the value of those mortgages. Essentially, that means using tax dollars to pay people’s mortgages.
On the flip side, loan modifications, and foreclosures for that matter, haven’t gained any positive ground. More and more underwater borrowers are bypassing home-preservation efforts and merely walking away from their mortgages. Even many of the home loans that have been modified are redefaulting.
So What’s the Answer?
Simply stated, many are saying — despite popular opinion — that it’s time to start reducing the principal balance on mortgages, at least for borrowers who live in markets where home-price declines are substantial. Furthermore, the analysts are saying that it may also help solve Fannie and Freddie’s loan mod redefault problem.
Readers: Are you for or against principal reductions?