FHFA Announces Principal Reduction: Why the Numbers Are So Small and Why It Still Matters

Note

FHFA Announces Principal Reduction: Why the Numbers Are So Small and Why It Still Matters

Abstract

The Federal Housing Finance Agency announced on April 14 that Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) would offer principal reduction to a targeted group of underwater borrowers. Given the careful design of the program and the rapidly declining number of borrowers who would be well served by such help, the near-term impact of the step will be minimal. The step is nonetheless important as it represents a break from the long-held position of the GSEs to decline offering such relief under any circumstances. In this note, we describe the program, its likely impact over the near term, and why it matters over the long term.

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