The Department of the Treasury may soon be implementing strong incentives that would prompt the principal reduction process on mortgages backed by Fannie Mae and Freddie Mac.
During a speech at the HousingWire REThink Symposium, Freddie Mac CEO Ed Haldeman said the Treasury could triple the payments to mortgage investors who allow principal reductions for troubled homeowners through the Home Affordable Modification Program.
"I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us," Haldeman said. "We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments - which could be 50 percent of what you could write down - it may be in our economic self-interest to participate in that."
Real estate data indicates that there are currently an estimated 11.1 million borrowers who are underwater on the home loans, with roughly 3.3 million owned by the government-sponsored enterprises. If these homeowners were granted a principal reduction, it could vastly improve their financial well-being and prevent them from defaulting on their mortgages or entering foreclosure.
However, the use of principal reductions does not come without some risk. The GSEs fear the implementation could result in some homeowners who are underwater, but still current on their payments to strategically default on their loans with the hopes of receiving a principal reduction.
"As we complete the review, the public should understand that Fannie Mae and Freddie Mac continue to offer a broad array of assistance to troubled borrowers and have continued to implement HARP 2.0 to enhance refinancing opportunities for underwater borrowers," the Federal Housing Finance Agency recently said in a statement.
Additionally, the mortgage giants recently announced they plan to launch a pilot program that would make it easier for real estate investors to purchase REO-properties in bulk out of their distressed inventories. If this program is successful, it could be applied to other areas of the housing market in the future.
Industry experts hope that through this program, investors will be able to buy up large quantities of vacant home and resell them for a profit or convert them into affordable rental units. It's believed that by doing so, stability could be added to a number of housing markets that have maintained high vacancy rates in the wake of the housing market collapse.