Having equity (the difference between the value of the home and what the borrower owes) allows a borrower to more easily refinance or sell the home to avoid default and strengthens his or her incentive to continue to pay off the mortgage. (This report refers to HAMP without principal reduction as “standard HAMP.”) For the borrower, principal forgiveness provides not only a lower monthly payment, but also, unlike standard HAMP, an improved equity position as a result of the lower loan balance. Before then, the program had been limited to other ways of reducing payments. In 2010, the Treasury Department expanded the program to include the possibility of principal forgiveness, a reduction in the amount the borrower owes. CBO's report describes how HAMP has evolved to include principal reductions: Within the Troubled Asset Relief Program (TARP) is the Home Affordable Modification Program (HAMP), a centerpiece in the government's effort to assist struggling homeowners. The three different options they detailed for principal forgiveness would all reduce the deficit slightly by avoiding defaults on mortgages and, consequently, Fannie and Freddie-incurred losses that would be greater than the cost of the writedown.įirst, the report goes into a little background on the housing situation. If Watt is confirmed, that could change.Ĭoincidentally, the CBO released a report the same day as the Watt nomination, analyzing different possibilities for principal forgiveness for FHFA mortgages. Although President Obama supports allowing principal forgiveness in Fannie and Freddie-backed mortgages, DeMarco has not, and thus the policy has not been implemented. One issue that has received attention in recent years is "principal forgiveness" for mortgages backed by Fannie and Freddie, which would involve writing down the balance of mortgages where payments are delinquent or default is a possibility rather than reducing monthly interest payments or making other loan modifications. If confirmed, he would replace current chief Ed DeMarco in a move that could signal a policy shift at the FHFA. Mel Watt (D-NC) to be the head of the Federal Housing Finance Agency (FHFA), the agency in charge of Fannie Mae and Freddie Mac. Yesterday, President Obama nominated Rep. Sometimes, the timing of things can really work out in Washington.
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