The two largest owners of mortgages will not lower the principal on the loans they back – that’s a clear message for all those troubled homeowners. Fannie Mae and Freddie Mac, which are controlled by the federal government, will not lower the principal on the loans they back, instead opting for interest rate reductions and term extensions when modifying loans. But their stance is out of synch with the Obama administration, which is seeking to expand the use of principal writedowns. In late March, it announced servicers will be required to consider lowering balances in loan modifications. Asked whether they will implement balance reductions, the companies and their regulator declined to comment.

The Treasury Department also declined to comment. What’s holding them back is the companies’ mandate to conserve their assets and limit their need for taxpayer-funded cash infusions, experts said. If Fannie and Freddie lower homeowners’ loan balances, they are locking in losses because they have to write down the value of those mortgages. Essentially, that means using tax dollars to pay people’s mortgages. Between them, they have received $127 billion — and recently requested another $19 billion — from the Treasury Department since they were placed into conservatorship in September 2008, at the height of the financial crisis. Treasury and the companies have already set aside $75 billion for foreclosure prevention, which can be spent on interest-rate reductions or principal write downs. Meanwhile, a growing number of loans backed by Fannie and Freddie are falling into default.

PLUS:  Look  what Diana Olick said:

Diana Olick – Banks Ignore Delinquent Borrowers

“Some encouraging signs on the foreclosure front may not be as rosy as some are reporting. RealtyTrac, the online foreclosure sale site, shows a 9 percent dip in the number of properties with foreclosure filings in April, month-to-month.  The driver of that dip is a big drop in new notices of default. The final stage of foreclosure is bank repossessions (REO) shot up to a new record high, up 45 percent from a year ago. When I first read the report I thought, okay, we knew there was a big pipeline of loans that would not get modified and would have to come out the end at some point; now is that point. The fact that fewer loans are going into the pipeline should be our focus, and that’s a positive. That’s what I thought until I interviewed RealtyTrac’s Rick Sharga. “People are sitting in their houses not paying their mortgages, and the banks are letting those delinquencies extend longer and longer periods of time before they put them in foreclosure,” Sharga told me. That, he  adds, is the main reason we’re seeing lower numbers of new defaults. The borrowers are in default, but the banks aren’t paying attention, so they don’t show up in the numbers.

“The fact that we have six to six and a half million loans that are either seriously delinquent or in foreclosure also suggests we are not nearly out of the woods. If we just started to absorb that inventory at the pace we’re currently seeing new foreclosure proceedings we have about a 50 to 55 month supply of loans that yet have yet to be processed, so we have a way to go before we are out of the mess,” he added. Sharga makes a compelling point.  A lot of folks are either falling out of the trial modification period or not qualifying in the first place, and those loans are moving quickly to bank repossession. California-based mortgage analyst Mark Hanson adds perspective with a look at “cancelled foreclosures.”  These are not tracked by RealtyTrac, but they “bite right out of Notices of Default and foreclosures, so to get a real idea of how ‘credit’ is doing, you have to add a certain percentage back.”  That’s because Hanson believes the redefault rate on these modifications will be at the very least 50 percent 6-19 months out. “

What are your thoughts about this?