Principal Reduction vs. Easier Mortgage Refinancing

Last week, Edward J. DeMarco of the Federal Housing Finance Agency stated that the agency would not permit Fannie Mae and Freddie Mac to participate in principal reduction, a plan to trim the debts for homeowners at risk of foreclosure. The regulator stated that there are concerns that cutting principal debt for some borrowers would encourage other borrowers to default. This could be true, but if easier mortgage refinancing were available, this may not be necessary.

As the foreclosure, credit and housing bust has continued for so many years, many consumers are anxious to have this issue behind them. Some believe that to forgive substantial loan balances is the answer. Many others do not. When it comes to fairness, this becomes even more complicated.

FHFA stated again that it would not allow the mortgage finance companies to offer debt forgiveness to homeowners. The agency stated that after several months of study, debit forgiveness might help up to half a million homeowners, but the costs, especially to taxpayers, outweigh the benefits. One of the risk involved in principal reduction or forgiveness for delinquent borrowers is that other borrowers may look at this as an incentive to cease paying their mortgage in order to receive a principal forgiveness modification.

Through special mortgage refinance programs, such as HARP 2.0 and the FHA streamline refinance, many people have been able to reduce their monthly mortgage payments making it worth their time to remain in their current home. Expansions of these programs could further reach more homeowners and prevent future foreclosures.

If easier refinancing through HARP 2.0 were available for everyone, all underwater borrowers would be able to lower their monthly mortgage payments, and, therefore, not require a principal forgiveness. While HARP 2.0 is helping a large amount of borrowers at this time, there are more that have not been reached or do not qualify because of late mortgage payments. Tweaking this program might be a better way of handling all underwater borrowers than offering principal forgiveness. Most people do not want to foreclose, but would rather be able to obtain a mortgage refinance to lower their monthly mortgage payments. Another possibility is instead of principal reduction, this group could be given a grant or secondary loan that must be repaid at a certain time, when values are higher, or when the borrower decides to sell the home. At least there would be some fairness in this type of offer.

The majority of homeowners today are technically underwater, either through property value vs. mortgage amount or by the amount of funds they have paid over the course of their mortgage. Someone who purchased a home twenty years ago, has a $600 mortgage payment made over twenty years for a total of $144,000 is also underwater if the homes in the area are selling below that amount. They are underwater because they have paid more to the bank than the house is now worth and may not be able to receive that money if they sold. This person has no where to go, receives no help, cannot sell and recoup their money at this time. A traditional refinance is their only means to lower mortgage rates being offered today. Easier refinancing or refinancing for everyone, not just a special group, may be the better answer and also may be fair to all. Purchasing a home is a financial choice that comes with risk that one must be willing to live with. Even if only a small amount of homeowners require a principal reduction, the large amount of other homeowners may feel that it does not pay to be diligent and financially responsible if principal reduction was to take place. While there are several mortgage refinance options available right now, there is room for more options to be introduced to help the majority of homeowners.

FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders' rate sheets to determine the most accurate mortgage rates available to well qualified consumers at a standard 0.7 to 1% point origination fee.