Tens of thousands of homeowners may soon have their mortgage balances cut and even payments reworked according to a report by the Wall Street Journal and other sources. The aid comes under a plan that has recently been approved by Federal Housing Finance Agency, the regulator and overseer of mortgage-finance entities Fannie Mae and Freddie Mac.
More details are expected to be released in the coming weeks, but the plan is expected to provide mortgage relief for about 50,000 homeowners in the U.S. Though the plan has not been finalized, it will most likely only target those who are underwater on their mortgages (they owe more than the home is worth) and people who are behind on their mortgage payments.
Mortgage principal forgiveness will be doled out not as a mandate but as a business decision, in cases where Fannie and Freddie calculate that the mortgage amnesty will cost them far less than the risk of those homeowners foreclosing.
Although just released, the plan is already receiving its fair share of criticism. Housing experts point out that helping only about 50,000 underwater homeowners is just a drop in the bucket since housing researcher CoreLogic reports that about 4.3 million properties across the country are still in negative equity positions.
Furthermore, under the plan their principal won’t be reduced to the point where they have positive equity or are at a break-even point compared to what the home is worth, but just partially reduced. While it’s hard to see the logic behind partial principal reduction, it could serve as a powerful incentive for homeowners to want to keep their homes instead of foreclosing as the first option.
But lowering principal levels will also help reduce payments, and under the arrangement there will also be a workout process to keep delinquent homeowners in their homes and get them back on track and caught up.
While this will definitely be the most significant action Fannie and Freddie have taken to reduce mortgage balances and help struggling homeowners since the mortgage meltdown and housing crisis (which is quickly approaching its ten year anniversary!), many think it won’t go far enough – or shouldn’t be enacted at all.
This proposed plan is rekindling the debate about whether struggling homeowners who have missed payments should be helped at all. Personal “bailouts” are just not a popular idea, especially when history shows that losing your house doesn’t necessarily have to be a catastrophic event, as millions of Americans recovered relatively quickly after foreclosing by renting, rebuilding their credit scores and finances, and even buying homes again in the last couple years.
Critics and conservatives cite a “moral hazard” that emerges if you help certain homeowners but not others, ostensibly incentivizing people to miss payments or even stop making payments just to be eligible for the plan.
“Is the role of Fannie and Freddie to make sure your house doesn’t decline in value?” said Mark Calabria, director of financial regulation studies at the libertarian Cato Institute. “I don’t remember seeing that in the charter.”
But others argue that normalizing principal and getting homeowners back on track with payments is the most financial viable solution – and a great investment in people and communities. Those benefits also should save taxpayers money in the long run versus the cost burden of foreclosures.
“Homeowners behave differently when they feel like a glorified renter versus when they feel like they’re an owner,” says Julia Gordon, executive VP of the National Community Stabilization Trust.
The debate over this hot button issue has been debated for years, since the Obama administration rolled out the Home Affordable Modification Program, which encouraged banks and lenders to reduce mortgage principal in many cases. The FHFA has been largely ineffectual at reducing principal, but studies show that reducing payments – not mortgage balances – help risky homeowners the most.
The debate was put aside in a shallow grave when the economic recovery ensued and housing equity rose all across the nation at healthy levels, bring a huge number of homeowners back up from “underwater” on their mortgages.
But now, this new Federal Housing Finance Agency plan should breathe life back into the controversy, though its real effect on the housing market is still to be determined.
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Do you want to see if you might be eligible for any new Federal Housing Finance Agency mortgage forgiveness plan, or if your loan is with Fannie Mae or Freddie Mac? Send us an email and we’d be happy to take a look at your mortgage loan with you and see what options are available.