Mortgage principle reductions embraced by FHA

Mortgage principle reductions (“cram downs”) about to become more available to prevent foreclosure.

We have long recommended that reductions in mortgage principle are the best way to deal with delinquent mortgages.  It is better for BOTH the lender and the home owner to reduce principle (and monthly payments) than to foreclose.  The lender usually ends up with more money than they would get if they foreclosed; the homeowner gets to stay in the house; and the neighbors avoid the blight of an unoccupied house.  Win, win, win.

But up until now, the FHA, which insures a huge percentage of mortgages, has refused to consider principle reductions (“cram downs”) for reasons I have never understood.   Now, according to the Wall Street Journal, they have found a way to make them happen.

Fannie Mae and Freddie Mac are going to auction off delinquent mortgages to private investors at the same price as they would get if they foreclosed (they normally lose roughly 64 cents on the dollar).  These investors must agree not to foreclose for six months and not to sell at least half the mortgages they buy for at least three years.  This leaves them with strong incentive to modify the mortgages, including reducing the principle.

By reducing principle balance they make payments affordable and the house is no longer “under water.”  This program could save tens of thousands of homeowners from eviction.  The FHA has 700,000 loans that are currently in default.

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