Borrowers Want Big Mortgage Reductions, Poll Says
NEW YORK ( TheStreet) -- Homeowners struggling with mortgages that exceed the value of their homes would like to see more policy efforts directed towards principal reduction compared to any other form of mortgage relief, according to a poll run by TheStreet.
Over the past six months the Obama administration has introduced a slew of measures designed to provide some relief to borrowers, particularly those stuck with mortgages that exceeds the value of their homes.
From revising the guidelines under HAMP (Home Affordable Modification Program) and HARP(Home Affordable Refinance Program) to introducing legislation that would allow all borrowers current on their payments to refinance loans through the Federal Housing Administration at low interest rates to forcing banks to offer $10 billion in principal reductions under a nationwide mortgage settlement , policymakers have been trying to ease the burden on "responsible" homeowners.
Principal reductions have been a particularly controversial form of mortgage relief that the government has been pushing. The rationale being that reducing the principal on mortgages helps reduce the negative equity on a home. Currently, there is nearly $700 billion of negative equity in the housing market- that is, where the borrower owes more than a home is worth.
Negative equity makes it tough for borrowers to refinance their homes even as interest rates decline and makes it harder to sell their homes either in an effort to repay their debt or in order to pursue job opportunities in another location. This results in more defaults, weighing on the housing market and the economy.
Still, the Federal Housing Finance Agency (FHFA), conservator of Fannie Mae and Freddie Mac, which underwrites the majority of the nation's mortgages, remains fundamentally opposed to the idea of reducing the principal on a mortgage because it means the housing giants will have to absorb more losses, which will be ultimately borne by the taxpayer. Fannie Mae and Freddie Mac were bailed out in 2008 and have cost taxpayers more than $150 billion to date.
FHFA director Edward DeMarco insists that other forms of mortgage modifications such as principal forbearance, interest rate reductions and term extensions are equally effective in reducing monthly payments for borrowers and still minimize overall losses to Fannie and Freddie and the taxpayer.
DeMarco also worries that principal reductions will create a moral hazard. Right now, 80% of Fannie and Freddie's borrowers with negative equity are still current on their loans. Making blanket principal reductions might encourage those who are current on their loans to default, in order to be eligible for a principal reduction.
Still, in a poll run by TheStreet last week, more than half of the voters said they would prefer principal reductions that would help restore equity in their homes. They were even willing to work with tradeoffs, agreeing to sacrifice a portion of future gains on their home value with lenders or investors.