Fannie and Freddie to allow principal reductions

In a rare victory for proponents of principal reduction, Fannie Mae and Freddie Mac said they will immediately allow their borrowers to participate in Keep Your Home California and other states’ Hardest Hit Fund programs that shrink the mortgages of troubled borrowers using taxpayer funds.

California officials made a significant change to the program last year, dropping a requirement that banks match taxpayer funds when homeowners receive mortgage reductions through the program. That means Fannie and Freddie will not have to incur further losses on their loans. The two mortgage giants have now released guidance to the mortgage companies that work with them, signaling they would allow Fannie and Freddie borrowers to get relief through the program.

Only a small number of California homeowners — 8,500 to 9,000 — would be able to get mortgage write-downs with the current level of funds available, The Times has previously reported. Nevertheless, the move was hailed as an important step by consumer advocates.

“Allowing some loans that are owned or insured by Fannie or Freddie to have their principal reduced is good news, and an important step,” said Paul Leonard, California director for the Center for Responsible Lending.

The participation by Fannie Mae and Freddie Mac could help officials spend the money available for the Keep Your Home California program. Fannie Mae and Freddie Mac own about 62% of outstanding mortgages in the Golden State, according to an estimate released by the state attorney general’s office this year. Neither had elected to participate in principal reduction because of concerns about additional costs to taxpayers, and the government-controlled firms won’t have to take writedowns through this program.

Keep Your Home California is part of the Obama administration’s Hardest Hit Fund initiative, which uses federal funds from the 2008 Wall Street bailout to help borrowers at risk of foreclosure.

alejandro.lazo@latimes.com