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Fannie Mae, Freddie Mac OK limited principal reduction in California

September 12, 2012|By Alejandro Lazo
  • Participation by Freddie Mac and Fannie Mae could significantly help officials spend the money available for the Keep Your Home California program.
Participation by Freddie Mac and Fannie Mae could significantly help officials… (Associated Press )

In a rare victory for proponents of principal reduction, Fannie Mae and Freddie Mac said they will immediately allow their borrowers to participate in the Keep Your Home California program that uses taxpayer funds to shrink the mortgages of troubled borrowers.

California officials made a significant change to the program last year, The Times reported previously, dropping a requirement that banks match taxpayer funds when homeowners receive mortgage reductions through the program. That means that Fannie and Freddie will not have to incur further losses on their loans in order to participate.

The two mortgage giants have now released guidance to the mortgage companies that work with them, signaling they would allow Fannie and Freddie borrowers to participate in the program.

“Effective immediately, you should participate in state ...  modification assistance programs that permit you to apply funds as a partial principal curtailment for homeowners with Freddie Mac-owned or guaranteed mortgages,” read the Freddie Mac guidance. “With this change, you have an additional way to help borrowers achieve a more affordable payment and reduce their loan-to-value ratio.”

Only a small number of California homeowners — 8,500 to 9,000 — would be able to get mortgage write-downs with the current level of funds available,  The Times had previously reported.

But the participation by Fannie Mae and Freddie Mac could significantly help officials spend the money available for the Keep Your Home California program. Fannie Mae and Freddie Mac own about 62% of outstanding mortgages in the Golden State, according to an estimate released by the state attorney general's office earlier this year. Neither had elected to participate in principal reduction because of concerns about additional costs to taxpayers, and they will not have to take write downs through this program.

“This is good news. Allowing some loans that are owned or insured by Fannie or Freddie to have their principal reduced is good news, and an important step,” said Paul Leonard, California director for the Center for Responsible Lending. “It's not perfect policy in the sense that … they are not absorbing any losses, whatsoever, for the wright-downs in principal, which arguably makes good policy sense, whether they are paid for or not. But certainly it is far better for borrowers to be able to have their principal reduced and stay in their homes.”

The initiative, which uses federal funds from the 2008 Wall Street bailout to help borrowers at risk of foreclosure, has faced lackluster participation and lender resistance since it was rolled out last year. By eliminating the requirement that banks provide matching funds, state officials hope to make it easier for homeowners to get principal reductions.

The two mortgage giants were seized by the federal government in 2008 as they bordered on bankruptcy, and taxpayers have provided billions to keep them afloat. Edward J. DeMarco, head of the federal agency that oversees Fannie and Freddie, has argued that principal reduction would not be in the best interest of taxpayers and that other types of loan modifications are more effective.

He refused to allow the two companies to participate in a principal reduction program through the Obama administration’s signature foreclosure relief program, the Home Affordable Modification Program.

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