A recent analysis by the mortgage giants Fannie Mae and Freddie Mac suggest that drastically reducing the amount of money owed on hundreds of thousands of underwater mortgages would be good business for everyone. They concluded that such loan forgiveness would not only keep many families in their homes but in doing so would save the companies money which in turn benefits the taxpayers who bailed out the mortgage holders to the tune of $150 billion.
Many economists and top policy makers insist that such a move would be the best course of action in keeping a fragile economic recovery going. On the other hand, a principal reduction of this magnitude could ultimately back-fire by encouraging more home owners to default on their loans. Some economists believe that if a sweeping principal reduction were to make its way to Main Street, home owners would be tempted to stop paying their mortgage to reduce the amount they owe on the home. Many borrowers who are paying their mortgages every month feel this is unfair- why should they have to pay their fair share when others who got into homes and mortgages they couldn’t afford get off the hook?
The analysis by Fannie and Freddie was presented to the Federal Housing Finance Agency last week and the decision lies directly in the hands of its director, Edward DeMarco. DeMarco has been public in his opposition to such principal reductions in the past, claiming that its bad business for both the companies and the tax payers.
Would a principal forgiveness make sense for underwater home owners? Does it reward bad behavior by reducing the amount owed on homes that were too much in the first place? Will the burden of a bailout by tax payers be lifted if the mortgage holders reduced the principal on underwater homes?
Jesse Eisinger, Senior Reporter, ProPublica – reported in conjunction with NPR’s Chris Arnold