Why Underwater Homeowners Won’t Be Saved By Bank Of America’s $17 Billion Deal

Huffington Post:
 

 

Under the latest settlement, Bank of America must allocate a minimum of $2.15 billion to principal reduction. Loan modifications will result in “numerous homeowners no longer being underwater on their mortgages and finally having substantial equity in their homes,” the Justice Department said in a press release.

But there’s little reason to expect that more than a few underwater Bank of America homeowners will receive a loan reduction. That’s because the nation’s top housing regulator continues to refuse to allow write-downs on loans controlled by Fannie Mae and Freddie Mac — the vast majority of outstanding mortgage debt. In the past, Bank of America has chosen to offer big write-offs to relatively few homeowners with expensive mortgages, rather than give principal reductions to a larger number of homeowners with smaller loans.

Two leaders of the Federal Housing Finance Agency, which regulates Fannie and Freddie, have refused to allow write-downs. Former FHFA acting director Edward DeMarco said reducing loan principal would encourage other borrowers to intentionally default, so they, too, could take advantage of a reduction. DeMarco stuck to this “moral hazard” argument, even though independent studies found that writing off debt would save taxpayer money, because fewer people would default.

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