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Homeowners may see principal reductions

A new incentive program for mortgage principal reductions might help more struggling Americans keep their homes.

By MSN Money Partner Mar 27, 2012 1:10PM

This post comes from Brian O'Connell at partner siteMainStreet.


Freddie Mac is hinting that government-sponsoredhome mortgages may soon offer a big "out" for troubled homeowners -- reduced principal on their mortgages. Is it too good to be true? Maybe not.


Image: Couple with home (© Stockbyte/SuperStock)There's no debating the fact that mortgage foreclosures, after a brief respite, are creeping upward again.


According to RealtyTrac, foreclosures could rise by 25% in 2012 as banks and mortgage lenders clamp down on delinquent homeowners now that the "robo-signing" scandal is in the rearview mirror.


Last year saw a reduction in foreclosures as lenders haggled with state attorneys general in court over the validity of mortgage documents filed by mortgage servicers.


That issue has largely been resolved after a $25 billion agreement between lenders and state attorneys general, with the bulk of the money going to help homeowners who have either been foreclosed upon or are delinquent in their mortgages.


That's why only 1.89 million properties were foreclosed upon in 2011, down 34% from 2010 -- banks and lenders had to get their legal ducks in a row before clamping down on delinquent homeowners. (Post continues below.)

Now that's starting to happen again. RealtyTrac reports that mortgage lenders are starting to "push through" some of the delayed foreclosures.


With more foreclosures on the way, Freddie Mac may be gearing up to help out struggling homeowners with a new principal-reduction program. The U.S. Treasury Department recently said it would triple incentive programs for mortgage investors to green-light mortgage principal reductions in home loan modifications.


Essentially, the deal would give investors up to 63 cents (up from between 6 cents and 18 cents originally) for each $1 forgiven under the government's Home Affordable Modification Program.


At a HousingWire conference last week, Freddie Mac CEO Charles Haldeman said the Treasury incentive gave Freddie Mac some incentive of its own to OK principal reductions for homeowners.


"I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us," Haldeman told the HousingWire audience. "We will re-evaluate that to see what may be in our economic best interest. If there are very large incentive payments -- which could be 50% of what you could write down -- it may be in our economic self-interest to participate in that."


Both Fannie Mae and Freddie Mac have reportedly started to lay the groundwork needed to begin offering mortgage reductions to financially troubled homeowners. In reports to regulators earlier this month, both lenders told federal regulators that principal mortgage write-downs could stabilize the teetering U.S. housing market by allowing more Americans to keep their homes.


More Americans keeping their homes means less houses with "for sale" signs on their lawns. That keeps home values up and pours more money into the creaky U.S. economy.


In an interview with National Public Radio last week, Moody's Analytics Chief Economist Mark Zandi says as much. "Principal reduction works," he said. "If someone gets a reduction in their principal amount, it gives them a powerful hook to really fight to try to hang on to the home and not go into foreclosure."


There's no guarantee that a huge mortgage-reduction program is in the works, but at least the table is being set by Fannie Mae and Freddie Mac. That's good news for homeowners behind on their mortgages, but it might leave more stable homeowners scratching their heads and asking, "Where's mine?"


More on MainStreet and MSN Money:

Mar 27, 2012 5:06PM

A principal reduction for one person is a loss for someone else and with the incentives it’s also a bailout that will be funded by the taxpayers. 


The banks service the loans, they don’t own them, they’re owned by pension funds and other investors.  That means the taxpayers will lose when they bailout the irresponsible homeowner, and they’ll lose again when their investments take a hit or they have to bailout pension funds.

Mar 28, 2012 9:18AM
Won't work, those being bailed out never should have had the house from the start.
Apr 6, 2012 6:43PM

I have been denied every hamp and harp program and am $80,000 under water. I am struggling to keep up and have used credit cards to pay things like home taxes and repairs. So if no help with principle comes my way foreclosure is my best solution along with chapter 13 bankruptcy as I make too much money to go with a chapter 7. It is not fun but i am 8 years away from retirement and cannot afford my house or sell it, so how can I try to save for retirement in this situation? Lawyer says choice. If freddie offers principle write down I can reconsider and maybe keep the house. then then the situation lines up totally differently. Otherwise I will be retired and broke, want to support me then? I have owned 5 houses and never missed a payment before for over 30 years but now am 60 days late. It is easy to moralize when you have enough money to live, nopt so easy when you are broke!!!!


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