Fannie & Freddie Agree to Help California Homeowners Pay Down Principals

California homeowners got some welcome news this week when Fannie Mae and Freddie Mac signed on to participate in Keep Your Home California, a $2 billion foreclosure prevention program intended to make it easier for homeowners to reduce the principal owed on their mortgages.

This move came after California officials dropped a requirement of Keep Your Home California that asked banks to match taxpayers’ funds when homeowners receive mortgage reductions through the program.

The state, with money allocated to it by the federal government, will contribute all of the money to the program and help fewer California borrowers than originally proposed. The program is run by the California Housing Finance Agency and uses money that was reserved for the 2008 Wall Street bailout. Financial institutions will be required to make other modifications to loans that are reduced such as interest rate reductions or changes to the terms of the loans. The changes to the program will roll out in early June, officials with the California agency said.

The California agency estimates as many as 8,500 to 9,000 borrowers could be aided under the changes to the principal reduction component of the program. The state agency will also increase to $100,000 from $50,000 the amount of aid borrowers can receive.

The Treasury Department originally announced the Hardest Hit fund (HHF) in February 2010 as a $1.5 billion program for five state housing finance agencies where home prices dropped 20%: Arizona, California, Florida, Michigan and Nevada. It soon grew through three additional rounds of funding to a $7.6 billion program going to 18 states and the District of Columbia.

The money was meant to develop programs and entice mortgage servicers to provide modifications, short sales, unemployment assistance and principal reduction. Treasury approved the first programs in June 2010 and initiatives in other states roughly three months later.

In April, Freddie Mac, in a letter to its servicers, said mortgage servicers must participate in Hardest Hit Fund transition assistance programs from 18 states and the District of Columbia through short sales and other foreclosure alternatives.

Over the life of the Hardest Hit Fund, which ends in 2017, the state housing finance agencies across the nation estimate helping 459,000 homeowners with some sort of relief.

Will this bring more homeowners to the table in California?