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Forced mortgage reductions?

By Judy Martel · Bankrate.com
Monday, April 9, 2012
Posted: 6 pm ET

So far, Fannie Mae and Freddie Mac have resisted reducing mortgage principal for homeowners who owe more on their mortgage than their home is worth, but that may change.

Edward DeMarco, acting head of the Federal Housing Finance Agency, which controls government-owned Fannie and Freddie, has argued that since taxpayers are footing the bill for any mortgage write-downs, other methods of helping homeowners such as refinance options should be explored first.

But Shaun Donovan, the secretary for the U.S. Department of Housing and Urban Development, said on C-SPAN that Fannie and Freddie could be legally bound to approve mortgage write-downs for some homeowners because the U.S. Treasury has offered to share half the cost.

In his comments, reported by the Wall Street Journal, Donovan said he is concerned that homeowners who "see no light at the end of the tunnel" will ultimately default on their loan. He added that he's not as worried about homeowners strategically defaulting, meaning they choose to walk away from their underwater mortgage even though they can afford to pay.

DeMarco says 3 out of 4 homeowners with underwater mortgages underwritten by Fannie and Freddie are still making regular payments, and he thinks loan-forgiveness programs offered only to some will discourage the others. Donovan counters that there are ways to ensure homeowners don't strategically default, but he didn't specify what they were.

A mortgage write-down program targets only those homeowners owing at least 125 percent of the value of their home and who are behind on their payments. The U.S. Treasury has offered to assist Fannie and Freddie with the write-downs by dipping into the unspent housing funds derived from the 2008 $700 billion bank rescue.

Do you think that principal reduction programs are a good idea, or do you agree with DeMarco that they may encourage strategic default among those who can afford their monthly payments?

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