The debate on “principal forgiveness” goes on. Policymakers from Treasury secretary Timothy Geithner to numerous members of Congress are urging lenders and mortgage servicers to reduce loan balances to help homeowners remain in their houses and prevent additional foreclosures, given the fact that 12 million homeowners are “underwater” on their mortgages and in danger of defaulting.Even Christine Lagarde, the head of the International Monetary Fund, has called on the U.S. government to reduce mortgage debt “as a way to help revive that nation’s economy and stimulate growth in the wider industrialized world.”

The debate seems to be particularly intense with regard to loans held or guaranteed by Fannie Mae and Freddie Mac, where acting Federal Housing Finance Agency director Edward DeMarco seems unconvinced that principal writedowns are in the best interests of the institutions he oversees and, ultimately, the taxpayer.

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