The two most powerful entities in the housing market — Fannie Mae and Freddie Mac — could be on the verge of a significant change regarding foreclosures. NPR and ProPublica have learned that both firms have concluded that giving homeowners a big break on their mortgages would make good financial sense in many cases.
In these so-called principal write-downs, a portion of the loan is forgiven for someone who's having trouble paying. Many Democrats are pushing for this change. Most Republicans are against it. So far, a key federal regulator is blocking Fannie and Freddie from adopting the approach.
In recent days, financial executives at Fannie and Freddie have made presentations to their regulator saying that principal reduction for many homeowners would prevent larger losses and keep people in their homes.
This is a big development in a charged political issue. Some economists and many Democratic lawmakers see principal reduction as a powerful tool for helping the housing market.
A Game Changer?
"Principal reduction works," says Mark Zandi, chief economist of Moody's Analytics. "If someone gets a reduction in their principal amount, it gives them a powerful hook to really fight to try to hang on to the home and not go into foreclosure."
As Zandi explains, if someone is struggling to pay a $200,000 mortgage and their house is only worth $150,000, the owner might decide to walk away. But if the lender forgives $50,000 of the amount owed, that's a game changer