A letter from Massachusetts Attorney General Martha Coakley was sent to the two government-controlled mortgage giants Freddie Mac and Fannie Mae instructing them of a new Massachusetts law that requires them to offer loan modifications that are "commercially reasonable." The letter was sent to the regulator of the two finance companies in hopes of raising the stakes in their dispute over whether helping struggling homeowners cut mortgage debt is beneficial.
The letter informs the director of the Federal Housing Finance Agency, Ed DeMarco that Freddie and Fannie, along with other creditors are to take commercially viable steps to help homeowners avoid foreclosure on certain mortgages. The agency is currently reviewing the letter and will respond to it at some point, according to an agency spokesperson. Ms. Coakley said the new law promotes the concept that reducing the mortgage debt and providing loan modifications for some homeowners is a useful tool in preventing unnecessary foreclosures.
Performing loan modifications that reduce mortgage debt can bring higher recoveries to certain lenders and it is that consensus that the new law hopes to get across to lenders. Although the law does not specifically force creditors to cut mortgage debt it does require lenders to take certain steps that may include principal forgiveness. The FHFA director has been resistant to cutting the principal mortgage on loans held by Freddie and Fannie stating he believes it could devalue a taxpayer's assets.
Earlier this year the director rejected a plan by the Obama administration to use some of the funds from the federal bank bailout program to reduce the principal on certain mortgages. Last February the Massachusetts Attorney General urged the director to consider principal forgiveness on certain loans and in this latest letter is asking him to reconsider his stand on loan modifications as a tool for preventing unnecessary foreclosures. It is possible to prevent a foreclosure and when push comes to shove, it may be beneficial for some families to consult with a residential real estate professional to learn about options available for refinancing or modifying a mortgage loan under current state and federal programs.
Source: Reuters, "Massachusetts tells Fannie, Freddie to follow new mortgage law," Aruna Viswanatha and Rachelle Younglai, Aug. 23, 2012
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