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Private Lenders Forgive Home Debt as U.S. Lenders Balk

Non-government holders of delinquent mortgages are offering more payment plans with debt forgiveness as Fannie Mae and Freddie Mac resist, according to the U.S. Office of the Comptroller of the Currency.

Principal reductions were granted in 8.5 percent of the 116,153 delinquent mortgages that received permanent modifications in the fourth quarter, according to a report by the unit of the Treasury Department. That’s up from 8.1 percent in the prior three-month period. Debt forgiveness was included in 16 percent of loans held by private investors, 25 percent of loans held in bank portfolios and in none owned by the government-run companies.

“Principal modifications can be a tool in the overall arsenal,” Bruce Krueger, a senior mortgage expert with the Comptroller’s office, said in a conference call with reporters today. “It just makes sense for homeowners who have been significantly underwater to take a principal writedown.”

Lenders have struggled to find ways to reduce losses as 12.1 percent of mortgages were delinquent or in foreclosure at the end of last year, down from 12.4 percent a year earlier, according to the Comptroller’s report. About 5 million homeowners have lost their property through foreclosure or other forfeiture actions since 2006, according to RealtyTrac Inc.

Fannie Mae and Freddie Mac, the mortgage financiers under government conservancy since 2008, haven’t granted principal reductions because it would cost the taxpayer-funded companies almost $100 billion, Edward DeMarco, the acting director of the Federal Housing Finance Agency, the U.S. agency overseeing the mortgage companies, said in a Jan. 20 letter to Congress.

Principal Deferrals

Private investors may have acquired the mortgages at a discount or been forced to write down the value of the loans to comply with U.S. banking regulations, making it easier for them to offer debt forgiveness, Krueger said.

Principal deferrals, which reduce payments by delaying rather than forgiving debt obligations, were offered on 20 percent for loans held by Freddie Mac, 26 percent by Fannie Mae, 30 percent by private investors and on 39 percent of mortgages in bank portfolios.

“We haven’t been able to determine whether principal reduction modification works better than principal deferral modification,” Krueger said.

Delinquent loans that received payment reductions greater than 10 percent have had a lower re-default rate than plans with smaller discounts, Krueger said.

Short Sales Increase

The number of permanent modifications fell 44 percent in the fourth quarter from a year earlier and 16 percent from the prior three-month period, according to the report. At the same time, the number of homes seized through foreclosures rose 22 percent to 116,060 and the number of short sales, when lenders agree to sell for less than the debt on the property, increased 29 percent from a year earlier to 63,257.

Owners of 768,773 homes had active mortgages modified under President Barack Obama’s Making Home Affordable program as of Jan. 31, the most recent data available from the Treasury Department. That included 44,058 loans with principal modifications, with a median debt reduction of $68,063. Almost half -- 46 percent -- of all non-government loans that received modifications in January came with principal reductions, according to a March 2 report, reducing the median loan-to-value ratio to 115 percent from 159 percent.

The Comptroller’s Mortgage Metrics report covers 31.4 million first-lien mortgages worth $5.4 trillion in outstanding balances, about 60 percent of all first-lien mortgages in the U.S. as of Dec. 31.

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