The Federal Housing Finance Agency (FHFA) will decide sometime in April whether the higher incentive fees the Treasury Department is paying are enough to justify allowing Fannie Mae and Freddie Mac to do principal reductions for the first time.

FHFA acting director Edward DeMarco has resisted pressure from the Obama administration over the past year to allow GSE servicers to do loan modifications that feature principal reductions.
In January, the Treasury hiked the incentive fees for principal reductions to cover up to 63% of the costs.

FHFA is currently evaluating whether Treasury has changed the "calculus," DeMarco told Bloomberg TV Wednesday." We will have an announcement sometime next month," he said.
The acting director claims that principal reduction (where a portion of the loan is written down) is too expensive and his job as conservator is to save taxpayer's money.

"We are trying to maximize assistance to borrowers to stay in their homes," DeMarco said in the interview, while minimizing the costs to the taxpayer.

He noted principal reduction would benefit the banks that own the second mortgage if the second isn't written off.

In addition, principal reduction would impact the mortgage insurance coverage on the loans. "Those are all parts of what we have to evaluate," DeMarco said.

Proponents of principal reductions claim this makes payments on underwater mortgages more affordable and motivates borrowers to stay current on their mortgages.

Fannie and Freddie currently lower the interest and principal payments on a mortgage for five years, but the borrower still owes the full amount of the original mortgage.

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