A new analysis by the Federal Housing Finance Agency discovered that lowering mortgage principal for approximately 691,000 homeowners who owe more than their homes are worth, would reduce Fannie Mae and Freddie Mac's losses by about $1.7 billion, compared with some other type of loan modification, according to the New York Times.
However, the Treasury Department would need to pay $3.8 billion in incentives for the reductions of principal, and that would result in a $2.1 billion net loss for taxpayers, according to the article. Edward J. Demarco, the overseer of Fannie Mae and Freddie Mac and the acting director of the FHFA, told the New York Times it might make economic sense in certain situations for the Fannie and Freddie to decrease borrowers' mortgages, making it less likely for some homeowners to default.
But in a speech at the Brookings Institution, Demarco said the benefits of principal reduction is limited, and that the plan wouldn't be a magic bullet for homeowners, according to the article. The FHFA is expected to make a decision on principal reduction for homeowners in the next few weeks.
Click to read the entire article at the New York Times.