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Fannie and Freddie to allow principal reductions in California

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Fannie Mae and Freddie Mac are government-sponsored entities that own or guarantee a huge portion of American mortgages — more than 60 percent, for example, in California. This week, Fannie and Freddie quietly put out some “clarifying language” that could mean a lot to some beleaguered homeowners in California and in other states.

The language gives a green light for banks and other mortgage servicers to get at something called the “Hardest Hit Fund.” It’s a big pot of TARP bailout money. It’s supposed to let qualifying homeowners reduce their principal on their loans — before they lose their houses. Instead, it’s been mostly untapped, for more than two years.

Earlier this week, Deborah Solomon wrote a column for Bloomberg calling for just this sort of action. She said there had been resistance from the people who own the loans and the states who are trying to figure out the best way to use the loans.

“It’s partly red tape,” Solomon said. “This money was set aside for state housing financing agencies, and those agencies by their charge are served a very small slice of the housing population, which is low- to moderate-income people. They’ve also set a lot of tough criteria about who can be helped. That’s one of the problems with the Obama administration’s approach — they’ve been trying to be very cautious in terms of who they help.” Some of the people, Solomon added, who should be getting helped aren’t reckless borrowers.

Solomon said that the change doesn’t do anything to solve the broader problem of Fannie and Freddie. “What it does is direct servicers who work with Fannie and Freddie to rework loans that are part of state programs that basically will allow Fannie and Freddie to take money from the states to pay down principal amounts.”

There are 11 million underwater homeowners in the U.S. right now; Solomon said this program will help about 9,000 people. “That’s not a huge amount but the hope is that other states will follow suit and that potentially the federal government can take some of the unused money to pay down principal amounts more broadly.”

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