Pressures Heighten on Underwater Principal Reductions

By Mike Colpitts

The U.S. secretary of housing is stepping up pressure on the nation’s giant mortgage lenders to provide principal reductions underwateron Freddie Mac and Fannie Mae mortgages in a move supported by the Obama administration. The effort would supply a much needed fix to the housing market.

HUD Secretary Shaun Donovan made the statement during a news conference, saying that the White House is considering “additional steps to make mortgage principal reductions available to Fannie and Freddie homeowners.”

The move to reduce underwater homeowners’ mortgages is favored by Democrats in Congress, and goes beyond other programs bolstered by the Obama administration, which has thrown a series of programs at the housing crisis. “I hope Fannie and Freddie accept the incentives and I hope they will do principal reductions,” said Donovan.

“Fannie and Freddie are doing extensive payment modifications for homeowners but not, to date, doing significant principal reductions. We need to break the logjam of principal reductions.”

The chief administer of the Federal Housing Finance Agency (FHFA), which oversees both mortgage giants is opposed to principal reductions on mortgages, saying it would cost tax payers too much. A program instituted this last December eliminated loan-to-value ratios on home loans being refinanced on Freddie Mac and Fannie Mae mortgages, producing a wave of mortgage refinancing.

real estate collpase

The U.S. Treasury Department has offered triple incentives to banks and mortgage companies willing to cut mortgage principal for underwater homeowners through the Home Affordable Modification Program (HAMP).

Declining home values in the majority of U.S. housing markets are putting a drag on home sales to consumers nearly six years after the real estate market collapsed. Home prices have fallen as much as 80% in some of the hardest hit neighborhoods since the markets peak.

The squabble between the Treasury and the FHFA started to over see the nation’s mortgage giants is a roadblock to the housing markets recovery. Acting FHFA Director Edward DeMarco said, “that FHFA recently released analysis concluding that principal forgiveness did not provide benefits that were greater than principal forbearance as a loss mitigation tool.”

Congressional Democrats have called for DeMarco’s resignation, suggesting that the administration select an administrator who favors their recommendations. However, additional government housing analysts are expected to see that the only way the housing market will gain greater stabilization is to reduce mortgage principal on underwater mortgages, which were artificially inflated by financial manipulations during the years that preceded the financial crisis.