Principal Reduction and the GSEs

Brief

Principal Reduction and the GSEs

The Moment for a Big Impact Has Passed

Abstract

The Federal Housing Finance Agency is revisiting its prohibition against unilaterally reducing the principal balance of loans, a practice known as principal reduction. This paper evaluates how many GSE borrowers would likely benefit from a principal reduction program today. We conclude that even with aggressive measures to improve take-up, the impact of any principal reduction program through the GSEs will likely be modest. The recovery of home prices has wiped out most of the country’s negative equity, and with it the opportunity for the kind of large-scale impact that a principal reduction could have had only a few years ago.

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