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Fannie and Freddie won’t forgive

By Judy Martel ·
Wednesday, August 1, 2012
Posted: 7 pm ET

Withstanding pressure from the Obama administration, Fannie Mae and Freddie Mac held firm to their decision not to reduce mortgage principal for underwater homeowners.

Ed DeMarco, head of the Federal Housing Finance Agency, which oversees Fannie and Freddie, contends that principal reductions would not make a meaningful improvement in staving off potential foreclosures and would instead cost taxpayers more money. The two mortgage firms were taken over and bailed out by the government in 2008. Together, they back about 60 percent of home loans.

The administration is seeking ways to reduce the $700 billion mortgage overhang debt created by the housing bust that left about a quarter of homeowners owing more on their mortgage than their home is worth. They've come up with the Home Affordable Modification Program Principal Reduction Alternative. In addition to costing the taxpayers more money, DeMarco says the program will present operational challenges and could result in up to 19,000 homeowners who are current on their monthly payments deciding to strategically default.

Treasury Secretary Timothy Geithner opposes DeMarco's decision, saying that by helping distressed homeowners, the housing market will improve, and taxpayers will see a net benefit in the end. In January, the Treasury Department offered to partially subsidize the cost of a principal write-down program using the unspent housing aid funds.

Many readers wrote in response to my last post, opposing mortgage forgiveness. Do you agree with DeMarco's decision to refuse to participate in mortgage principal reductions?

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August 10, 2012 at 6:56 pm

What about people like my parents who were financially stable, credit score of 780 prior, and earned everything they had working for companies for 38 years straight prior to the market exploding. Then when it does they lose their jobs and my father has a heart attack and is out of work for a year because he is 63 and can't get hired anywhere.

So it isn't worth helping these types of Americans who have basically been the back bone of the country for centuries, whose lives and everything they've worked has been destroyed because of banks (bankers) making bad bets that blew up in they're faces?

You guys are absolutely asinine, you assume its "welfare" there are honest hard working people who have supported this country and banks who need their country/banks to return the favor so they don't lose everything they have spent their lives building.

Fico Fisher
August 03, 2012 at 4:48 pm

If principal on a mortgage loan is forgiven, perhaps the lender can recover if the borrower is required to maintain Life Insurance Policy with the lender as the beneficiary. It is not fair to forgive principal. Whats next. . . subsiding gas, electric & water bills just because they are higher than they were a few years ago?

August 03, 2012 at 11:10 am

A lot of families are not doing so good, maybe considering that, we as Americans need to back each other up. So what they want to help out families by reducing the mortgage principals for any family. It helps, especially if the house isn't worth what there are paying for any way. Life shouldn't be based about working to pay off your mortgage and that's it, there should be more available for hard working families. Ex. A landlord who has high rent in an area where rents are lower, the chances are that he/she will not have an easy ride. Now putting the rents at an affordable price will allow a tenant to remain and manage through the tough times.

August 02, 2012 at 3:41 pm

I have two problems with the proposal:

1. What does "targeted" mean? What is the criterion (underwater by a certain percentage, politically connected, etc.)?
2. What proof is there that taxpayers will benefit and to what extent? This sounds like a theory. Let's not add to the national debt based on an economists hunch.

August 02, 2012 at 1:23 pm

me112233, while I agree that wholesale principal reductions are unwarranted, I absolutely disagree that "the value will one day boomerang right back up".

This is a reasonable assumption in certain areas of the country that foster a diverse business community or have other attractions that are not based solely on financial well-being.

It is most definitely NOT true in Michigan and many other areas that are in dire financial straits. Property in some areas of mid-Michigan has lost more than 50% of its value in 5-6 years and there is zero evidence to support the presumption that those values will increase AT ALL - let alone, significantly - any time soon. There is actually plenty of evidence that property values there will continue to decrease. There's an excellent chance that property purchased in the last 5-10 years will never climb back to those values during the 30-year lifetime of the mortgages.

August 02, 2012 at 5:42 am

Yes, I agree that morgage balances should NOT be reduced just because the house is currently worth less than what is owed. For starters, the value will one day boomerang right back up, and the people will be unjustly enriched. But more importantly, there are other people with houses that went down in value, but since they paid a larger down payment, they aren't "underwater." It is just not "fair" to give money to one set of people simply because they borrowed more money on their house (instead of their cars, boats, student loans, whatever), yet not give free money to the people who lived a more frugal lifestyle and paid more money on their house, and are therefore not underwater. The idea that only people who are underwater should get a bailout is the ultimate example of all that is wrong with welfare. Virtually every homeowner in the nation saw their home values go down; so if you are going to give a gift to those who mortgaged up to their ears, you ought to give an equal gift to those who made a big downpayment (or had their home fully paid for when the "crisis" hit).