Principal Reduction From FHFA Unlikely For Underwater Borrowers

Borrowers who owe more on their homes than they are worth may need to seek a mortgage refinance or another alternative after the regulator for Fannie Mae and Freddie Mac said his organization would be unlikely to offer widespread principal reduction to those borrowers.

Some struggling homeowners may not know when to refinance, but if they begin the process before their loan-to-value ratio becomes too skewed, they may be in the clear. The most recent housing data has found that nearly 11 million properties in the United States - almost one-quarter of all properties - were in negative equity.

Democratic lawmakers have recently been appealing to the Federal Housing Finance Agency (FHFA), which manages Fannie Mae and Freddie Mac, in an attempt to convince it to assist underwater borrowers by forgiving some of the amount they owe on their principals. Republicans and the FHFA itself have balked at this request, particularly following FHFA analysis that has found such a process would cost the regulator $100 billion.

In a letter last week to legislators on the Oversight and Government Reform Committee, FHFA acting director Edward DeMarco said these additional costs could further undermine the two government-sponsored enterprises.

"Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action," DeMarco said in the letter.

Although most mortgage lenders are reluctant to provide financing options to borrowers who owe more than their homes are worth, or who are even close to being underwater, some are willing to take on these high-risk borrowers.

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