Fears of strategic defaults overstated, says analysts

Despite a number of industry experts claiming that principal writedowns could be a moral hazard to borrowers who are current on their home loan backed by Fannie Mae and Freddie Mac, new analysis begs to differ.

Despite a number of industry experts claiming that principal writedowns could be a moral hazard to borrowers who are current on their home loan backed by Fannie Mae and Freddie Mac, new analysis begs to differ.

In a recent report from Keefe, Bruyette & Woods, the company claims that fears over strategic defaults are overstated since the proposed lending regulation for such programs would prevent such activity.  

"We believe that any principal write-downs will likely be just for mortgages that are modified through the HAMP principal reduction alternative," analysts from the real estate analysis firm said. "Under the program investors are partially compensated for writing down principal on delinquent underwater loans. The administration recently raised the compensation levels to 18 to 63 cents on the dollar from six to 21 cents earlier."

The notion of allowing principal reductions has caused some controversy in the mortgage industry in the wake of the housing market collapse. However, a number of industry groups and nonprofits have come forward with proposed programs that could implement such an initiative with reduced risk.

One such pilot program was proposed by the Center for American Progress, in which Fannie and Freddie would receive a percentage of a homes appreciated values once a principal reduction in implemented.



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