This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Don't Wait for a Principal Reduction on Your Home

NEW YORK ( MainStreet) -- For underwater homeowners and many who want to help them, there is a Holy Grail: principal reduction.

But now, four years after the housing market started to collapse it may be time for a reality check. For most troubled borrowers, principal reduction is a remedy that may never happen.

Underwater homeowners have been pushing the government to explore principal reduction, but some doubt the proposal will become a reality.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency that oversees Fannie Mae and Freddie Mac, said in a speech Tuesday that principal reduction could make some economic sense. The agency is expected to make a decision on the matter within a few weeks.

But DeMarco's comments were lukewarm and accompanied by several reservations. Despite heavy pressure from the Obama administration and many Congressional Democrats, DeMarco seems unlikely to embrace principal reduction for large numbers of borrowers. His sentiments are widely shared among lenders and mortgage securities investors.

What's the problem?

Advocates argue that reducing the homeowner's debt balance is a win-win solution. Reducing the debt to the home's current value, which in many cases is far less than the homeowner originally paid, can encourage the homeowner to keep making payments rather than to fall into foreclosure or walk away.

Lenders would win, too, because they'd lose less through principal reduction than foreclosure. Many foreclosed homes are resold for less than half of their pre-crisis value, while the debt reduction might be only 20% or 30%, perhaps less.

But if it were that easy, lenders would be jumping at the opportunity. They haven't, in part, because it is very difficult to get the owners of mortgage-backed securities to go along. And there are tricky issues involving private equity loans that may use the same property as collateral.

But one of the biggest obstacles is concern over unintended consequences. If it becomes clear that part of the debt can be forgiven, more homeowners may fall behind intentionally to qualify, making the overall problem bigger than it was.

Also, opponents charge that principal reduction amounts to a "free lunch" that rewards deadbeats. Forgiveness can be seen as unfair to homeowners who keep up with payments, unfair to investors in mortgage securities, unfair to lenders' stockholders. It also can be seen as unfair to taxpayers, as the lenders have shown they won't go along with principal reduction without generous tax-supported financial incentives.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs