Restoring the US housing market is critical to our nation's economic recovery. That is why we are disappointed with the Federal Housing Finance Agency's (FHFA) announcement today that it will not permit targeted forgiveness of loan principal balances for struggling homeowners. This decision means that principal reductions are not an option for Fannie Mae and Freddie Mac loans even when reducing principal balances would return more money to those entities than any other type of modification. This is a lost opportunity to stabilize housing markets and property values by giving more homeowners a chance to restructure unaffordable loans and avoid foreclosure.
FHFA's own analysis found that allowing principal reductions on up to 500,000 mortgages held by Fannie Mae and Freddie Mac could provide a potential total benefit of up to $3.6 billion to these agencies, and up to a $1 billion benefit to taxpayers. In addition, principal reduction is already being used routinely by other mortgage holders—including major banks—to minimize losses on loans not held by Fannie Mae and Freddie Mac.
Conversely, we are pleased to see that Freddie Mac will now offer improved streamlined refinances for homeowners with a loan-to-value ratio of 80 percent or less. This will increase the number of homeowners who can refinance their underwater mortgages to take advantage of lower interest rates, and put more money back in the pockets of everyday Americans. While this is a welcome change, it does not substitute for the potential benefits associated with broader use of principal reduction.