Freddie Mac, Fannie Mae borrowers could see principal reduction

Thanks to a key policy change, troubled borrowers with loans that are owned or backed by Fannie Mae and Freddie Mac may be allowed to participate in a state program that slashes the size of those home loans through principal reduction, according to a statement by their regulator.

Principal reductions are the writing down of loan balances. Last week, officials who run the Keep Your Home California program told The Times they were dropping a requirement that financial institutions must match taxpayer funds when mortgages are shrunk in this manner.

[Updated 2:37 p.m.: Last year, both companies issued directives to the mortgage servicers that work with them, indicating that they would be allowed to participate in such programs as long as they or those servicers would not have to match those funds. Here is the directive from Fannie Mae and here is the directive from Freddie Mac.]

On Monday, a spokeswoman for the financial regulator that governs the two companies told The Times that those changes would allow the two companies to participate.

“Fannie Mae and Freddie Mac (the Enterprises) may accept the pay down of mortgage principal funded through a Hardest Hit Fund program provided other Guide requirements are satisfied,” spokeswoman Stefanie Johnson wrote in an e-mailed statement. “The Enterprises will work with the (state) to apply its new program to Enterprise loans.”

The participation by the two mortgage giants in the principal reduction component of the Keep Your Home California program could give the initiative a major boost. Fannie Mae and Freddie Mac own a big share of mortgages in the Golden State, but since the program was unveiled last year neither has elected to participate.

Edward J. DeMarco, head of the independent federal agency that oversees Fannie Mae and Freddie Mac, has argued that reducing principal on mortgages owned or guaranteed by them is not consistent with his agency’s mandate to protect taxpayers.

The state, with money allocated to it by the federal government, will contribute all of the money and help fewer California borrowers than originally proposed. The program is run by the California Housing Finance Agency and uses money that was reserved for the 2008 Wall Street bailout. Financial institutions will be required to make other modifications to loans that are reduced such as interest rate reductions or changes to the terms of the loans. The changes to the program will roll out in early June, officials with the California agency said.

The California agency estimates as many as 8,500 to 9,000 borrowers could be aided under the changes to the principal reduction component of the program. The state agency will also increase to $100,000 from $50,000 the amount of aid borrowers can receive.

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