The Obama administration has been pushing for banks and investors to cut mortgage balances for homeowners who owe more than their home is worth. But the regulator for the biggest investors of them all -- the government-controlled Fannie Mae and Freddie Mac -- won't let the two do it.
The administration and some banks themselves have increasingly seen reducing the size of a borrower's loan -- what's known as principal reduction -- as an important tool for helping the quarter of all homeowners who are underwater on their mortgages. The Treasury Department told ProPublica that the imbalance between what borrowers owe and what their homes are worth is one of the "main causes" of homeowners defaulting on their loans.
The administration sees principal reduction as a win-win, keeping families in their homes and allowing owners of the mortgages to recoup more money than they would through foreclosures. The logic is that if homeowners owe closer to what their home is actually worth, it decreases the likelihood they will default on the loan even after its modified.
Fannie and Freddie would seem to be the perfect players to promote principal reduction to prevent foreclosures. They're under government control, and they own or guarantee about half of the country's mortgages, meaning they pay the loss if a homeowner defaults. Because of that dominance, they also set the tone for how companies manage, or "service" in industry parlance, delinquent loans.
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