![handle is hein.congrec/cbo11071 and id is 1 raw text is: 44 MAY 20]13
Modifying Mortgages Involving
Fannie Mae and Freddie Mac:
Options for Principal Forgiveness
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Summary
At the end of 2012, housing prices were 30 percent below their peak in 2006, and
about one-fifth of borrowers with residential mortgages were underwater, owing more
than the value of their homes. Default rates are particularly high among such
borrowers. One of the primary ways that the federal government has assisted
underwater borrowers is through the Home Affordable Modification Program (HAMP).
That program, administered by the Department of the Treasury, has facilitated lower
payments on some mortgages by providing incentives for mortgage holders and
servicers to help borrowers avoid foreclosure.
In 2010, the Treasury Department expanded the program to include the possibility of
principal forgiveness, a reduction in the amount the borrower owes. Before then, the
program had been limited to other ways of reducing payments. (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. 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. Since the introduction of that
alternative, one in four borrowers participating in HAMP has received a principal
reduction, the Congressional Budget Office (CBO) estimates. However, that program is
small-fewer than ]120,000 borrowers had obtained a principal reduction through
HAMP as of the end of 20]12.
The approach of using principal forgiveness has not been adopted by Fannie Mae and
Freddie Mac. Those two government-sponsored enterprises (OS Es) own or guarantee](ViewImageLocal?handle=hein.congrec/cbo11071&div=1&collection=&method=preview&ext=.png&size=3)
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