Budget Office: Principal Reductions Would Save Taxpayers Billions, Reduce Unnecessary Foreclosures

Giving government-sponsored mortgage giants Fannie Mae and Freddie Mac the authority to allow homeowners to reduce the amount of principal they owe on their mortgages would save taxpayers billions of dollars while reducing the number of foreclosures and delinquencies, according to a new report from the nonpartisan Congressional Budget Office. The report was done at the request of 45 House Democrats who have pushed the Federal Housing Finance Agency (FHFA) to provide Fannie and Freddie with that authority.


The CBO analyzed three separate scenarios for principal reductions under the Home Affordable Modification Program (HAMP), which largely failed to provide sufficient help to homeowners after it was instituted by President Obama in 2009. Any of those scenarios, the report found, would save taxpayers billions of dollars and avert unnecessary defaults and foreclosures.

Acting FHFA director Edward DeMarco has been the primary foil to the institution of principal reductions, as he has argued that they wouldn’t be effective, that they wouldn’t be fair, and that they would be giveaways to big banks. Multiple reports, however, have shown that principal reductions would be the most effective way to help homeowners while also shielding taxpayers. The effort to give Fannie and Freddie the authority to reduce principal got a shot in the arm Wednesday when President Obama nominated North Carolina Rep. Mel Watt (D) to replace DeMarco at FHFA. Watt is an outspoken proponent of principal reductions.

The three scenarios CBO tested would not have a tremendous effect on the housing market, as it would produce fewer than 600,000 modifications and avert fewer than 100,000 defaults. Still, it shows that principal reductions would be a smart policy for both taxpayers and struggling homeowners, and a more ambitious plan could have an even bigger effect. “”Policies with broader eligibility than those CBO analyzed could have larger effects,” the report said.

By Travis Waldron

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