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Federal regulator: Home loan principle reductions could save $1.7 billion, but...

The man placed in charge of regulating Fannie Mae and Freddie Mac in the wake of the housing market crisis says that reducing the principle balances on underwater mortgages backed by the government-owned companies could save $1.7 billion.

Edward DeMarco, the acting director of the Federal Housing Finance Agency has received criticism for refusing to allow mortgage principal reductions in Fannie Mae and Freddie Mac backed loans. He said Monday that although a preliminary analysis conducted by the FHFA has concluded the write-downs could save significant money, he does not think a broad based principle reduction program will solve the housing market problems that continue in the wake of the home mortgage foreclosure and financial meltdown.

The head of the housing regulatory agency says that a broad based principle reduction program may encourage homeowners with underwater mortgages to become delinquent on their payments to quality for a principle reduction. He says that added delinquency rates in government backed home mortgages would add financial burdens on taxpayers. "A key risk in principal forgiveness targeted at delinquent borrowers is the incentive created for some portion of these current borrowers to cease paying in search of a principal forgiveness modification," he says.

Many economists, state officials across the country, and lawmakers have urged that the federal government should allow principle reductions for underwater mortgages. DeMarco says that he believes there are more cost-effective ways to help struggling homeowners, such as lower interest rates, instead of principle write-downs.

He says that much of the $1.7 billion in savings that his agency says the government-owned mortgage companies would save would be more than offset by costs incurred in the incentive program that would be associated with a principle reduction program. He says the savings noted in the preliminary report do "not account for any offsetting benefits in terms of greater housing market stability" if a principal reduction program resulted in reduced foreclosures across the country.

The FHFA analysis continues, and the agency is expected to complete the analysis soon. DeMarco says that he will make a final decision when the analysis is complete, and expects to finalize his decision on principle reductions for Freddie Mac and Fannie Mae loans later this month.

Source: Los Angeles Times, "Regulator: Mortgage principal reductions could save $1.7 billion," Jim Puzzanghera, April 10, 2012

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