May 13, 2011: Reducing the principal on troubled mortgages may be a part of a settlement offer proposed by state attorneys general to mortgage servicers, but the industry’s largest investors – Fannie Mae and Freddie Mac — say principal reductions are not a part of their plans.
Freddie Mac CEO Charles ‘Ed’ Haldeman told a crowd at HousingWire’s REthink Symposium this week principal write-downs do not make sense for Freddie Mac.
On principal writedowns, Haldeman said the benefit to Freddie Mac would be quite small because its delinquency rate, at 3.6% in the first quarter, is already quite low and far below the national rate of 8.6%.
Fannie Mae had a similar reaction when contacted by HousingWire on the issue of principal write-downs.
“Servicers use a number of tools to get an eligible borrower’s mortgage payment down to a level that is affordable and sustainable, including rate reductions, term extensions and principal forbearances,” a Fannie Mae spokesman said. “Principal write down is not one of the tools servicers use on Fannie Mae loans.”
Principal writedowns became more relevant — and controversial — than ever when it was recently revealed that Attorneys Generals may include a principal writedown component to their settlement with loan servicers over improperly preparing foreclosure documents. A common criticism of principal writedown is that by offering to reduce the amount a borrower owes, it would encourage other borrowers who owe more than their home is worth but could afford to continue making payments to default on their loans so they too could get their principal reduced — or, as economists call it, moral hazard. That concern is not unreasonable, but it shouldn’t stop us from pursuing principal writedowns for one simple reason: they work.