According to Fitch Ratings, principal reductions may be the most effective means to repairing the nation's mortgage industry, HousingWire reports.
Analysts from the real estate data firm indicate that by giving principal reductions to current borrowers, the rate of mortgage delinquencies and foreclosures would decrease.
"I have no doubt about that," Fitch managing director Robert Curran told HousingWire.
Industry experts argue that principal reductions would not only improve household's financial positions and make them more resilient to economic shocks, but also effectively improve migration between labor markets.
However, he added that investors continue to be concerned about the impact that principal reductions would have on profits, so they are hesitant to use the measure until further research and analysis is completed.
"It may in the end - if principal reductions were to occur - lead to higher costs of financing for all loans that were employed," Curran said. "To be specific, we've looked at it and we think they would have a meaningful impact on the level of foreclosures."
Meanwhile, during recent years, lawmakers have been approaching the Federal Housing Finance Agency, Fannie Mae and Freddie Mac in order to obtain a thorough report of what principal reductions would mean for the companies' profits.
Some members of Congress have gone as far as calling for the government-sponsored enterprises to be subpoenaed to release a reports on the matter.
"While Mr. DeMarco has failed to provide supporting mortgage records demonstrating why a principal reduction program is not in the best interest of taxpayers, economists are increasingly announcing their support for such a program," Representatives Elijah Cummings and John Tierney wrote in a letter to the FHFA.
More specifically, the letter called on the FHFA to provide "the statutory provisions" that prohibit prohibit principal reductions by Fannie and Freddie, while providing the analysis conducted by the agency that would indicate that principal reductions would be more damaging to the long-term interest of the American public than foreclosure and default.
However, FHFA acting director Edward DeMarco has repeatedly stated that implementing principal reductions on mortgages backed by Fannie and Freddie would undoubtedly result in a widening of their profit margins. This could be devastating for the mortgage giants since they already owe approximately $151 billion in bailouts to the Treasury Department.