Palm Springs Valley – Legislators in California are urging the Federal Housing Finance Agency to allow mortgage principal write-downs to help homeowners who are “underwater.”

This approved resolution was introduced by Assemblywoman Nancy Skinner, D-Berkeley to urge Freddie Mac and Fannie Mae to immediately offer principal reductions to homeowners who owe more than their homes are worth.

The reason for this push comes after the acting director of the Federal Housing Finance Agency said he would not allow Freddie Mac and Fannie Mae to lower the amount some underwater homeowners owe on their mortgages – even in the face of new new financial incentives from the Obama administration.

The reason given for not offering write-downs is because the FHFA said its analysis determined that principal reductions would be too expensive for taxpayers and would not necessarily improve the ability of many homeowners to avoid foreclosure.

Real estate professionals, lenders and economists in the Palm Springs Valley are of the belief that such a principal reduction could help the housing market to recover.  However, it also raises some key questions — mainly, how would the write-downs be accomplished?

One local realtor thinks we should try to do anything we can to help homeowners stay in their homes – it’s one of the things to deter strategic defaults.  And some local economists and financial experts question whether urging principal write-downs is the right approach.

A local Palm Springs Valley economist says that the intention is obvious – and it’s  a good one, but he questions what the consequences would be and thinks write-downs are a big mistake.  His feeling is that it  makes more sense to let the market work itself out.  And sometimes, such measures simply raise hopes and delay inevitable short sales or foreclosures.  Also, it’s not right to offer mortgage relief for some underwater homeowners and not for others.

This economist stated that some banks already are voluntarily reducing principal for underwater borrowers, though they’re not talking about  it.  Banks are looking at the option of a foreclosure or short sale, where they’re going to lose money anyway versus a homeowner who is making payments to reduce their principal and continues to live in his or her home.

A local Valley loan officer has said he knows of underwater homeowners who have had their principals reduced voluntarily by lenders, and it generally works this way . . . the lender modifies the loans by saying, ‘If you pay on time every month for the next three years, we’ll reduce the principal X number of dollars.”

Another point that has been brought up is the raising of moral issues – whereas, some people got into something they shouldn’t have, but writing down their debt rewards mistakes or irresponsibility . . . and how do you determine who deserves it and who doesn’t?

It will be interesting to watch this dialogue as it continues – justifiable points on either side.