Forcing Fannie Mae and Freddie Mac to reduce the principal on their delinquent loans would mitigate taxpayer losses, reduce foreclosures, and help stabilize home prices, according to Sen. Robert Menendez, D-N.J.
Currently, the GSEs and their regulator will not allow seller/servicers to use principal reductions in helping at-risk homeowners.
Sen. Menendez is concerned this policy leads to more displaced families, falling property values and a lower tax base for local governments. "When we fail to do principal reductions when it is fitting and appropriate, we are not mitigating the loss, we are taking in my view a much larger loss," the senator said at a Senate Banking subcommittee hearing last this week.
The Housing subcommittee chairman noted that taxpayers are on the hook for honoring guarantees on $4.6 trillion of single-family loans because of the government's September 2008 takeover of Fannie and Freddie.
"My concern at this point in time is how we mitigate the consequences to the federal taxpayer," Sen. Menendez said.
Most mortgage industry officials strongly oppose principal reductions.
Mortgage Banking Association president and chief executive David Stevens testified that principal reductions are "highly problematic" and servicers cannot obligate the note holder or investor to take a permanent loss.
Amherst Securities Group senior managing director Laurie Goodman testified that loan modification programs for underwater borrowers are "markedly more successful" when principal reduction is used on the first mortgage and the second mortgage is eliminated completely. "Our research shows that a principal reduction modification has the highest likelihood of successfully rehabilitating a borrower, and will ultimately result in the lowest re-default rate," Goodman said.
