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Much more can be done with proven strategies like short sales, home leaseback programs and refinancing for underwater borrowers.
July 17 -
A proposal by San Bernardino County to use eminent domain to take control of underwater mortgages would hurt government-sponsored entities Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It would also hurt plans to reduce the government's role in housing.
July 19 -
Strategic defaulters have lost the incentive to pay. Something should be done to replace that incentive, not simply reduce debt.
April 24
The federal agency that regulates Fannie Mae and Freddie Mac is
At the center of this debate is concern over moral hazard.
While this concern is legitimate, it’s easily mitigated. As FHFA reconsiders whether to allow principal reductions on some of the
First, there are ways Fannie and Freddie can structure a principal reduction program without creating skewed incentives for borrowers. Mortgage expert Laurie Goodman of Amherst Securities recently
Another solution is to impose some sort of fee on program participation, ensuring the borrower has to give up something valuable before receiving a principal reduction. For example, in exchange for a writedown now, the borrower can give up a meaningful portion of any future price appreciation on the home, known as "
Second, the moral hazard argument assumes homeowners have the option to default at little to no cost, making principal reduction a windfall for any underwater borrower that’s proven willing and able to make their monthly payments. That’s simply untrue.
In reality, borrowers give up quite a lot by choosing to default. Delinquent borrowers see a blemish in their credit history, making it much more difficult to take out a loan in the future, and they’re typically unable to refinance to today’s
Finally, there’s little evidence underwater borrowers actually act this way. When the nation’s five largest mortgage servicers began offering more principal reductions in compliance with a recent
To be sure,
When the federal government stepped in to save the country's largest financial institutions in 2008, a shared sense of urgency trumped concerns over fairness and skewed incentives. Nearly four years later, in the midst of what is arguably the worst foreclosure crisis in U.S. history, it's time we put banks and American homeowners on the same moral footing.
If done carefully, targeted principal reductions can give
John Griffith is a policy analyst with the housing team at the Center for American Progress.