By Mike Colpitts
A progressive Washington based group is lobbying to reduce mortgage principal in an effort to help all homeowners, and Democratic members of the Senate Banking Committee are urging the reductions.
The Center for American Progress is pushing for mortgage reductions on Freddie Mac and Fannie Mae held mortgages and is expected to expand its effort to the entire mortgage market.
Nearly one in three U.S. home mortgages are underwater or close to being upside down, according to real estate research firm CoreLogic. An estimated 7-million homes are in the foreclosure pipeline.
“While principal reduction will give more struggling homeowners a fighting chance at staying in their homes, this is not a matter of charity,” said John Griffith, co-author of the report at the Center for American Progress. “At its core, principal reduction is good business. A carefully designed principal-reduction program—one that limits long-term risks born by Fannie and Freddie and focuses on borrowers that actually need a reduction—would save the government-sponsored enterprises and the taxpayers supporting them billions of dollars.”
All 12 Democrats on the Senate Banking Committee are urging the Federal Housing Finance Agency to eliminate restrictions on Fannie and Freddie mortgages. The FHFA cut loan to value ratios on some mortgages held by the government mortgage giants, and eased appraisal requirements.
In a letter sent to the FHFA, lawmakers recommended additional measures, including the elimination of upfront fees on loans held by the government lenders and suggested making it easier for homeowners with less than 20% equity to obtain refinancing.
A consensus among economists shows that principal reduction is often the most cost effective way to avoid foreclosure for borrowers, including many who are considering strategically defaulting by walking away from their homes.
Refinancing, extending the loan’s terms, modifying the mortgage rate, deferring payments and reducing mortgage principal are options for the government agency regulating the mortgage giants to consider.
Principal reductions for deeply underwater homeowners facing long term economic hardships, such as a permanent reduction in wages are possible for some borrowers. These families are at high risk of default and often cannot see long term upside from making monthly mortgage payments after more than five years of declining home prices in many areas of the country.