Are Fannie Mae and Freddie Mac Doing Principal Reductions?

Posted on May 17 By Justin McHood

In many parts of the country, a significant number of homeowners currently owe more on their mortgage than their home is worth. The result this negative equity problem is that many people are going into foreclosure or short selling their home -- or even doing something called a strategic default, where they can afford the payment but choose to leave the home.

And at least one popular theory has the Obama administration pushing for more principal reductions (reducing the amount owed on the mortgage) as a tool to help stem the tide of foreclosures.

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.

But their stance is out of synch with the Obama administration, which is seeking to expand the use of principal writedowns. In late March, it announced servicers will be required to consider lowering balances in loan modifications.

The problem here is that nothing is official and no one seems to want to comment on whether or not Fannie Mae or Freddie Mac will start doing principal reductions for troubled homeowners.

Why would Fannie Mae and Freddie Mac be hesitant to do principal reductions?

What's holding them back is the companies' mandate to conserve their assets and limit their need for taxpayer-funded cash infusions, experts said. 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.

I don't know whether or not principal reductions will become a new tool -- but with the Obama administration pushing for it, I suspect that something like this is coming soon.

And no, that doesn't mean that I am officially commenting on it... just guessing.

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