David McNew/Getty Images
A recent ProPublica/NPR report on Freddie May refusing to refinance mortgages for struggling homeowners shows that the market is still coming to terms with new ways of measuring risk.
There's a battle looming between Congress and the Federal Housing Finance Agency, the entity that's been responsible for mortgage giants Freddie Mac and Fannie Mae since the two were taken over by the government during the financial crisis. California and New York are also in the fray, given that those states' attorneys general have been resisting a mortgage settlement with big banks. But that resistance may be collapsing, now that principal writedowns are on the table. Meanwhile, the FHFA remains opposed to writedowns.
So what would principal writedowns entail? Well, the problem many homeowners are up against is that they owe more than their homes are worth. If they paid $300,000, with a 10 percent downpayment, the principal is $270,000. That's what they financed through the mortgage at whatever interest rate they were able to obtain. The monthly expense is made up of a payment that applies to the principal, the interest, and in may cases, insurance and property taxes. (And my example is boilerplate — in some regions, much higher loans, so-called "jumbo loans," make the situation more difficult.)