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The coming fight over principal reduction

By: 13 May 2012 No Comment

There have been a number of political spats over the past few years among lawmakers with the intention to help Americans through the housing crisis that’s been blamed for everything from falling housing prices to reduced sales.

We’ve seen the federal government bail out banks and attempt to remedy bogus foreclosure practices. We’ve watched the government put tax credits in place for home buyers and regulate the appraisal process in an attempt to make sure home values aren’t exaggerated. There have also been some attempts to help out home owners who are at risk of going into default.

Still, U.S. News and World Report said in April that 4 million home owners have lost their homes through foreclosure over the past few years and that 11 million Americans now owe more than their homes are worth.

How can those home owners be helped? The federal government has taken a look at the issue of principal reduction over the past few years. The notion, of course, is that reducing how much a person owes on a house will result in more affordable payments, thus leading to fewer defaults and less foreclosures.

There are, of course, some federal programs in place designed to achieve the goal of principal reduction. Take the Home Affordable Refinance Program (HARP), which is available to people owing more than their homes are worth and is available only to people with loans backed by Fannie Mae or Freddie Mac.

What about the 40 percent of Americans without mortgages underwritten by Fannie Mae or Freddie Mac? The Home Affordable Modification Program (HAMP), which is different from HARP in that it doesn’t allow for principal reduction. It can, however, lead to lower interest rates for even home owners without loans backed by Fannie Mae or Freddie Mac.

The end result of those programs? Foreclosure rates are still high and there are 11 million home owners who owe more than their homes are worth. The programs, then, have fallen short of the goal of significantly reversing the trend which finds home owners paying more than their homes are worth and getting in over their heads on mortgages.

Principal reduction is a straightforward concept, but putting it in place is difficult. The problem, of course, is that the institutions holding loans are asked to accept less money than they would if underwater home buyers pay what they owe under the mortgages.

Is the federal government supposed to compensate those lenders? If so, are taxpayers supposed to come up with that cash at a time when the government is heavily in debt and feeling pressured to slash costs?

Another problem has to do with who is helped. One can argue that there are two groups of home owners in trouble – those who were able to handle their mortgages just fine until they hit an economic roadblock such as losing a job and those who simply took out risky loans and should have known they’d run in trouble down the road. Do both groups deserve help?

The point of all this is that risk reduction is a sticky subject and it has been for a few years now. That issue might not get the most attention, but it’s an important one that could potentially impact millions of home owners.

Home Sweet Home is written by Ethan C. Nobles and is sent weekly to publications throughout the Natural State on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email =

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