Categorized | Finance and Mortgage

U.S. Won’t Solve Real Estate Crisis with Principal Reductions

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While the director of the Federal Housing Financing Agency continues to remain under fire for refusing to allow for principal reductions for underwater mortgages with Freddie Mac and Fannie Mae. Many banks and lenders have already allowed for principal reductions for their borrowers, the two embattled agencies have been forbidden to do so.

Some officials have negatively reacted to the unwillingness of the two to the reduce principals, calling them greedy. Others say that it remains the biggest obstacle to true housing recovery. Demarco, the director of the Federal Housing Financing Agency has been called the biggest obstacle to economic recovery on more than one occasion.

The mortgage mess certainly needs additional reform. However, economists are not sold on the proposed means of making up for the losses that will come from principal reductions. As such, they do not feel that the plan will be nearly as effective as Demarco’s biggest critics are saying.

While the idea of Fannie Mae and Freddie Mac reducing mortgage principals may seem excellent at first glance, the reality is that it would do very little, if anything, to expedite recovery in the residential real estate market. The plan would call on taxpayers to pay for principal write-downs and the major refinancing.

Although many of the three million borrowers using Fannie Mae and Freddie Mac are underwater on their mortgages, more than eighty percent continue to pay their mortgage payments on time. As such, principal reductions would likely not improve the situation any. Instead, it would just mean that taxpayers are paying for the homes instead of the borrowers.

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About Drew Wilson

Drew focuses on the Commercial and Mortgage/Finance categories.

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