Will The FHFA Offer Principal Reduction To Reduce Foreclosure Rates?

Over 22 percent of homeowners are underwater on their mortgages. And it is the state of being underwater that is one of the leading predictors of a future foreclosure. One way to avoid foreclosure is to reduce the principal on an underwater mortgage so that it is in line with today’s market reality. So why is it that the Federal Housing Finance Agency (FHFA) has failed to give the green light to Fannie Mae and Freddie Mac to reduce mortgage principal on underwater homes? Fear that it could prompt even more people to purposely default so they can take advantage of the program. But this may simply be flawed logic. The reality is that many homeowners are already defaulting because they are underwater. And even if there was some risk of causing a mass movement of strategic defaulters, the mortgage principal reduction program could be designed to discourage this type of behavior.

The Treasury Department has already offered generous incentives to any government sponsored enterprise that is willing to reduce mortgage principal on underwater homes. As of now, if Fannie Mae and Freddie Mac agreed to reduce mortgage principal by $100 billion it would only cost them $60 billion dollars because of incentives. If a mortgage principal reduction program is offered to homeowners who can afford the payments, we might significantly reduce the numbers of future foreclosures.