By Kevin Chiu
Troubled by an economy with a series of problems, the U.S. needs to face reality that its financial system is so problematic that mortgage principal reductions for homeowners at risk 
of default are the only route to getting the nation’s economy back on track.
The rate on a 30-year fixed rate mortgage hit 3.84% last week, according to Freddie Mac, the lowest the benchmark figure has ever been and it still hasn’t triggered a major recovery in the housing market. True, more first time buyers are able to take advantage of record low rates.
But most move-up buyers, who provide the life’s blood for the housing market, first selling their homes to purchase another, are still caught in the downturn. At the current pace of housing deflation, in the majority of the country 1 in 3 homeowners will be underwater by mid-2013.
Those who oppose principal mortgage reductions argue that cutting the size of a mortgage is like giving mortgage holders “free money” as if it’s a social injustice. Injustices have occurred during the real estate mess, but they took place long before mortgage borrowers signed the bottom line to take out their over sized loans. Injustices took place when lenders and Wall Street concocted their plan to sell mortgage securities at record rates to provide mortgages to anyone who could sign their name.
When the government took the responsibility for the securities out of the hands of those doing the lending they essentially gave a free pass to the industry. Sure, Freddie Mac and Fannie Mae would later sue lenders for making loans that would fail and be foreclosed because they were made on faulty grounds. But the bankers already had their money and were long gone.
The fallout for the U.S. economy has been enormous, and acts as a stranglehold on its growth. The stock market has been artificially engineered higher as a result of bail-outs to business and financial engineering by the Fed. But when the artificial blocks are removed the real economic pain will begin.
The issue has become a political football in Washington, D.C. as millions of Americans lose homes to foreclosure with little help of any government assistance. Two Republican Congressmen, House oversight committee chairman Darrell Issa (R-CA) and Rep. Patrick McHenry sent a letter last week against principal reductions to the Federal Housing Finance Agency, which oversees the nation’s giant mortgage lenders.
Two Democratic leaders, Rep. Elijah Cummings (D-MD) and John Tierney (D-MA) sent letters to the agency favoring mortgage principal reductions. Like so many things in Congress these days, it is unlikely that anything will get done to help troubled homeowners for years.
Members of Congress depend on bankers to fund their campaigns and to turn against them would be political suicide. Fannie Mae was about to start a pilot principal forgiveness program in 2010, but under political pressure the program that would have saved tax payers $410 million was quickly shut down.
The U.S. housing market is in recovery in some regions of the country but is still in dire economic straits, which means the overall economy will suffer. In every economic recession but one in U.S. history, housing pulled out first.
Politicians are working to heat the issue up like a frying pan on a stove top. But when the pan cools off the lard from the political bacon still floats to the top. If it’s left to sit for days, it produces a fowl odor. Reducing mortgage principal provides a way for millions of homeowners to stay in their homes and make mortgage payments.
There’s no saying that the cost of mortgage reductions will be cheap. Estimates vary. The acting administrator of the federal housing agency says the net cost of write downs could amount to $2.1 billion. The additional losses to the U.S. economy aren’t possible to accurately calculate if mortgage reductions aren’t made on a wide scale basis, but would be much larger.