CUNA General Counsel Eric Richard cautioned Credit Union Times that very few details about the plan have been released, and it has not been adopted by FHFA at this point.

“Any plan to reduce principal must be undertaken with great care to avoid giving an incentive to more homeowners to stop paying their mortgages,” he said.

The plan is apparently based on further subsidies to Fannie and Freddie to cover any principal reductions, he added, and other lenders, such as credit unions, who will not be getting such subsidies should not be expected to follow suit.

American Bankers Association President/CEO Frank Keating said in a statement that there are more cost-effective and efficient options for borrowers and American taxpayers than principal reduction.

“In most instances, principal reductions through Fannie Mae and Freddie Mac are not a feasible solution because they increase – rather than limit – taxpayers' liability, raise the cost of credit and create improper incentives for borrowers,” Keating said.

Principal reduction would create an incentive for “a huge group of borrowers” to stop making payments on their mortgages in hopes of principal forgiveness, he said. And, such a program would result in fewer investors willing to lend for housing finance, increased borrowing costs and tighter credit availability.