The Pro’s and Con’s of Proposed Principal Reduction Program

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In another attemptto fix the ailing housing market, the White House and Congressional Democratsare touting the benefits of a plan under which Fannie Mae and Freddie Mac wouldadopt a principal reduction program. But one man is questioning the wisdom ofthis approach. As we weigh the value of this proposal, we examine this man’s objections,because Ed DeMarco is acting director of the Federal Housing Finance Agency,and his opinion matters.For some time theWhite House and Democrats in Congress have been urging the adoption of thisapproach insisting that it will save billions and get the market movingagain.  DeMarco has stood hisground.  But he may be wavering.Writing in Marketwatch on April 10, Steve Goldsteinsummarized DeMarco’s objections.It’s costly. Although the ObamaAdministration claims it will save Freddie and Fannie $1.7 billion but thatcomes at a significant cost. The Treasury Department would pay out $3.8 billionin incentives for the principal reductions, meaning that taxpayers would footat $2.1 billion bill. Some who have paid their mortgages on time, and have seenthe value of their properties fall because of errant neighbors, may bereluctant to pay additional taxes to keep those neighbors in their homes.It’s only a band-aid – and a small one atthat. This program would help about 691,000 borrowers – out of about 11million underwater homeowners.We should use the programs that are alreadyin place such as interest rate reduction and extending the terms of themortgage instead of scattering our fire.How this playsout, remains to be seen.One question wemight ask is why are so many government programs aimed at fixing the housingcrisis failing so miserably?Another question:do the politicians just want to look as if they are actually trying to fix theproblem in an election year? Or are they really trying to fix the root causes,help underwater homeowners get back on their feet so they can responsibly paywhat they owe, stabilize housing prices, and revitalize communities? Let us know yourthoughts on these issues.