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Research Papers

Review of Options Available for Underwater Borrowers and Principal Forgiveness

Published: 7/31/2012
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In considering the use of principal forgiveness by Fannie Mae and Freddie Mac (the Enterprises), it is important to place this particular loss mitigation tool in the context of:

  • the Enterprises’ overall loss mitigation efforts;

  • costs and benefits of using principal forgiveness, including the economic benefit to the Enterprises and taxpayers in general;

  • the impact on borrowers’ behavior;

  • direct and indirect implementation costs; and

  • the overall impact on the mortgage market.

Since principal forgiveness is associated with providing assistance to underwater borrowers, this paper begins with a review of the scope of the underwater borrower problem. It then describes the Enterprises’ efforts related to underwater borrowers and summarizes the Federal Housing Finance Agency’s (FHFA) analysis of principal forgiveness.

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