Short Sales to Existing Homeowners?
Private sector experiences suggest that a carefully conceived principal reduction program could achieve significant savings for U.S. taxpayers by reducing losses at Fannie Mae and Freddie Mac. Such a program could be enacted responsibly and fairly without fueling moral hazard — the risk that borrowers who otherwise would make their mortgage payments go delinquent in an effort to get their principal balances reduced.
In effect, Fannie and Freddie can offer "short sales" back to the existing homeowners in return for a share of their home equity. Unlike foreclosure and traditional short sales, which are to third parties and usually at a discount to true market value, this approach would help support home prices, lower future default risk, and save taxpayers billions of dollars.