Addressing the Weak Housing Market: Is Principal Reduction the Answer?

The housing market remains weak years after the bursting of the housing bubble and despite numerous administration policies targeted at housing. Prices are still falling, foreclosures are proceeding, and many people have houses valued at less than the principal owed on their mortgages. Although some recent signs have been slightly more encouraging, the economic recovery has been, and continues to be, impeded by weakness in the housing market.

Some policymakers have been calling for federal regulators to push Fannie Mae and Freddie Mac to do principal reduction for borrowers whose house is worth less than what they owe on their mortgages. Is principal reduction the way to finally get the housing market back on its feet? What, if any, would be the cost to taxpayers? What should the future of housing finance look like and what is needed to prepare Fannie Mae and Freddie Mac for changes ahead?

On April 10, the Economic Studies program at Brookings hosted a conversation with Ed DeMarco, acting director of the Federal Housing Finance Agency, the conservator and regulator of Fannie Mae and Freddie Mac. DeMarco was followed by a panel of housing and consumer experts. Vice President and Co-Director of Economic Studies Karen Dynan gave introductory remarks, and Co-Director of Economic Studies Ted Gayer moderated the panel. Speakers took questions from the audience.

Participants followed the conversation on Twitter using the hashtag #BIHousing.