Foreclosure Loan Modifications Helping or Hurting?

Pressure is mounting in Washington to allow loan modifications with principal balance write-downs to bail out struggling homebuyers who borrowed too much money during the housing boom or took out a second mortgage to buy Hummers or take expensive vacations they couldn’t afford.

For months, U.S. Reps. Elijah E. Cummings, D-Md., and John F. Tierney, D-Mass., have accused the Federal Housing Finance Agency’s acting director, Edward DeMarco, of obstructing efforts to forgive debts of underwater borrowers. In a 9-page letter written by Reps. Cummings and Tierney, they accused FHFA of shelving a pilot loan forgiveness program for ideological reasons.

“Based on the documents we have obtained, it appears that the shared equity principal reduction pilot program should have been implemented years ago, and the failure to do so may have resulted in unnecessary losses to U.S. taxpayers,” Cummings and Tierney wrote in their joint letter. “This was not merely a missed opportunity, but a conscious choice that appears to have been based on ideology rather than Fannie Mae’s own data and analyses.”

DeMarco shot back in a letter to the congressmen “strongly” disagreeing with their claims.

“The fact that FHFA continues to consider principal forgiveness alternatives, including recent HAMP program changes initiated by the Treasury Department, belies any ideological tilt on our part,” wrote DeMarco, responding to the Cummings-Tierney letter. “Such a policy question, especially as it has to do with public funds being taken from one group of citizens to provide a benefit to another group of citizens, should be determined by Congress.”

Supporters of principal reduction argue mortgage write-downs through Fannie Mae and Freddie Mac would reduce foreclosures by lowering the monthly payments for underwater borrowers.  In an election year, many politicians want to take money from taxpayers (you and me) and transfer it to irresponsible borrowers.

Opponents counter that loan forgiveness on mortgages owned or back by Fannie and Freddie could increase their losses and encourage borrowers who are making payments to fall behind in order to lower their debt.

DeMarco believes Congress should pass write-downs laws. But Democrats know that after spending $700 billion bailing out Wall Street, there’s little or no political will in Washington to bail out delinquent borrowers.

Private lenders have been reluctant to write-down mortgages. They’re not foolish; they know writing-down debt is bad business. So, few delinquent borrowers are getting write-downs.

Readers, what do you think? Who’s being helped by write-downs?  Who’s losing out? Will writing down mortgage principal solve the housing market’s problems? Or is this yet another election-year, Beltway boondoggle aimed at getting votes?

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