Potential Principle Reductions In CA

Earlier this month, I noticed an article in the L.A. Times that seems to have flown under the radar – it appears that Fannie Mae & Freddie Mac will allow for a small number of principle reductions in California.  Finally.

While the article states that less than 10,000 homeowners will qualify (due to limited funds within the program providing the reductions), it’s a move that will likely surprise many.

From the onset of the housing crisis, Fannie and Freddie have strongly been against the idea of principle reductions – which reduce the amount of the mortgage still owed to equal the current fair market value of the house.  In the past, both mortgage backers have cited the borrowers “moral obligation” as well as the money they stand to lose, as reasons not to consider the reductions.

As I’ve noted in my blogs many times over, I believe principle reductions might be the only way to pull us out of the housing collapse – and at a much faster pace than if we were to just let the markets correct themselves.

Principle reductions will help keep people in their homes, which in turn will help protect the property values of the surrounding houses.  Foreclosures cripple the value of neighborhoods and start a vicious cycle that can destroy entire communities (See: Detroit).

The reductions will also infuse the local economy with cash, as people who have received the reduction will have more disposable income to spend.

And of course, the reductions will save Fannie & Freddie tens of thousands of dollars.  The foreclosure process is expensive, as is maintaining a foreclosed home.  In the end, they’ll only end up selling the house for fair market value anyway.  Unless they believe they can successfully pursue the borrower for the difference, a typical foreclosure could see them spending $50k+ only to re-sell the home for the same amount they could’ve reduced the principle to in the first place.

Hopefully, the program will be successful and it will not only grow in California, but also expand throughout the country.  To read more about it, follow this link.