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Fannie, Freddie Encouraged to Reduce Principal on Home Mortgages

Home foreclosures continue to affect millions of homeowners and their families nationwide. In an effort to stem the foreclosure crisis, some officials are calling for Freddie May and Fannie Mac, the two federally-backed mortgage lenders, to reduce principal amounts on outstanding mortgages.

Earlier this year, consumer advocates and the attorneys general of several states, including Massachusetts, asked Freddie May and Fannie Mac to consider allowing debt reduction on home loans to decrease the number of foreclosures. Currently, the agencies prohibit debt reduction on home loans that exceed the value of the property.

Benefits of Debt Reduction

Reducing the principal on a home mortgage is essentially a form of loan forgiveness. Currently, Fannie May and Freddie Mac allows struggling homeowners forbearance, which gives borrowers more time to make payments on their mortgages. However, some economists and housing experts say debt reduction is the most effective way to prevent foreclosures, and that forbearance is not enough to save many homes.

While critics of debt reduction say it would cost taxpayers, others say it would actually save money by preventing foreclosures. Families that benefited from debt reduction would continue making payments until the loan was paid off, rather than defaulting or declaring bankruptcy, in which case the lender might be left with a house worth less than the mortgage. Further, taxpayer-backed Fannie and Freddie hold a huge number of risky home loans. With fewer defaults, the agencies would require less taxpayer support.

Meanwhile, the Treasury Department has increased incentives for lenders to reduce principal amounts under the Home Affordable Modification Program. Further debt reduction could help as many as half a million home mortgage borrowers make ends meet and keep their homes.

Bankruptcy

Even with debt reduction, tough economic conditions have made it difficult for many homeowners and their families to make mortgage payments and pay other bills. Those facing foreclosure may be able to avoid it, and discharge their debts, through bankruptcy. If you are struggling with overwhelming debt, contact a skilled bankruptcy attorney to discuss your options.