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Did Fannie Mae and Freddie Mac Just Admit Principal Reduction is Good?

Mon Mar 26, 2012 by on Florida Law News

Could Fannie Mae and Freddie Mac finally be willing to sign off on principal reduction as a way to keep homeowners out of foreclosure and in their homes?

Edward DeMarco, the acting head of the Federal Housing Finance Agency and de facto leader of the two GSEs has been steadfast in his opposition.

President Obama has made principal reduction priority one. It was one of the highlights of the mortgage settlement and many economists point to it as the way out of this housing mess.

But DeMarco still hasn’t budged, because he says principal reduction will cost the taxpayer money and isn’t good for Fannie and Freddie’s bottom line.

Except maybe it is.

According to NPR and ProPublica, executives at both Fannie Mae and Freddie Mac have concluded that principal reduction would prevent larger losses and in fact, save the two companies money.

Their report claims that in part because of new Obama incentives, which would reimburse lenders half of what they write off, that Fannie and Freddie would benefit from principal reduction

These presentations have yet to be made public, but Democrats are already clamoring to see them. And so am I.

Look I’m not saying that principal reduction comes without risk. Could everyone decide to stop paying their mortgages in order to get a write-down? Sure.

But just because you might get hit by a car doesn’t mean you don’t cross the street. The housing market will NEVER rebound if people keep getting kicked to the curb.

And I don’t care what Edward DeMarco has said, the bottom line shouldn’t be his bottom line. It shouldn’t be about what is cost effective, it should be about what keeps borrowers in their homes. Last time I checked, they are taxpayers too.

And now in the wake of NPR and ProPublica’s investigation, it seems DeMarco has few legs to stand on.

We’ve seen what happens when foreclosure infects a neighborhood. Boarded up homes. More crime. Lower home values. Can you really tell me that the risk of moral contagion is so powerful that you would rather see empty neighborhoods instead?

I remember one Congressman in early 2009 who said “I don’t give a —- about moral contagion. I just care about keeping folks in their homes!”

Nice Thought!

Whether you like it or not principal reduction is finally on the horizon. It is an viable option. It does keep people in their homes. And as I’ve said all along, that’s the end game.

More and more banks will do. Yes they had their hand forced. And so far the sky hasn’t fallen.

And while less Fannie and Freddie loans are seriously delinquent, we can’t have two sets of rules. So if it’s good for the goose (big banks) then it’s good for the gander (Fannie Mae and Freddie Mac)

Now Edward DeMarco told NPR that he is reviewing these proposals to accept principal reduction. He’s come off as the grumpy old troll before, refusing to budge despite what I think is overwhelming evidence in favor of principal reduction.

Maybe, just maybe, he will finally come around. If not, he’ll likely be set packing!

Tags: bailout, demarco, Edward DeMarco, fannie, fannie mae, Federal Housing Finance Agency, federal takeover of fannie mae and freddie mac, foreclosure, foreclosures, freddie, Freddie Mac, GSE, homeowners, principal, principal reduction, reduction, subprime crisis impact timeline, subprime mortgage crisis