The Pro’s and Con’s of Proposed Principal Reduction Program

In another attempt to fix the ailing housing market, the White House and Congressional Democrats are touting the benefits of a plan under which Fannie Mae and Freddie Mac would adopt a principal reduction program. But one man is questioning the wisdom of this approach. As we weigh the value of this proposal, we examine this man’s objections, because Ed DeMarco is acting director of the Federal Housing Finance Agency, and his opinion matters.

For some time the White House and Democrats in Congress have been urging the adoption of this approach insisting that it will save billions and get the market moving again.  DeMarco has stood his ground.  But he may be wavering.

Writing in Marketwatch on April 10, Steve Goldstein summarized DeMarco’s objections.

It’s costly. Although the Obama Administration claims it will save Freddie and Fannie $1.7 billion but that comes at a significant cost. The Treasury Department would pay out $3.8 billion in incentives for the principal reductions, meaning that taxpayers would foot at $2.1 billion bill. Some who have paid their mortgages on time, and have seen the value of their properties fall because of errant neighbors, may be reluctant to pay additional taxes to keep those neighbors in their homes.

It’s only a band-aid – and a small one at that. This program would help about 691,000 borrowers – out of about 11 million underwater homeowners.

We should use the programs that are already in place such as interest rate reduction and extending the terms of the mortgage instead of scattering our fire.

How this plays out, remains to be seen.

One question we might ask is why are so many government programs aimed at fixing the housing crisis failing so miserably?

Another question: do the politicians just want to look as if they are actually trying to fix the problem in an election year? Or are they really trying to fix the root causes, help underwater homeowners get back on their feet so they can responsibly pay what they owe, stabilize housing prices, and revitalize communities?

Let us know your thoughts on these issues.