Loan Forgiveness Good for the Economy, and Maybe Fannie and Freddie Mac Too

New analyses by mortgage giants Freddie Mac and Fannie Mae have added an explosive new dimension to one of the most politically charged debates about the housing crisis: Whether to reduce the amount of money beleaguered homeowners owe on their mortgages.

Their conclusion: Such loan forgiveness wouldn't just help keep hundreds of thousands of families in their homes, it would also save Freddie and Fannie money. That, in turn, would help taxpayers, who bailed out the companies at a cost of more than $150 billion and are still on the hook for future losses.

The analyses, which have not been made public, were recently presented to the agency that controls the companies, the Federal Housing Finance Agency, according to two people familiar with the matter. Freddie Mac's meeting with the FHFA took place last week.

The decision of whether to allow such reductions rests with Edward DeMarco, the acting director of the FHFA, who has steadfastly opposed so-called principal reductions on the grounds that it's a bad business decision for the companies and would cost taxpayers money.

Many economists and policy makers contend that cutting principal — the amount of money lent to the homeowner — is one of the best solutions for keeping people in their homes and to bolster the fragile economic recovery. Read More