March 14, 2011 (Shirley Allen)
Wells Fargo & Co. CEO John Stumpf said that principal reductions could have a “huge impact” on Freddie Mac and Fannie Mae and that such a strategy could entice homeowners to default on their current loans in order to get a better deal, echoing the worries made last week by Bank of America chief executive Brian T. Moynihan.

Speaking at the Citigroup Inc Financial Services Conference, Stumpf said, “It’s a tool in our toolbox, but it’s not always the answer.” Stumpf also who noted the bank has forgiven $4 billion in loan principal for loans on its books.

“It makes no sense to (entice) people not to pay their debts,” he said.

Typically, when bank’s currently modify a mortgage, they reduce the interest rate, or extend the repayment period, however, the key provision under the mortgage settlement plan presented to the five largest mortgage servicers last week, calls for the reduction of a borrowers principal.

Last week, Bank of America’s Moynihan rejected the proposal by The Obama Administration, all 50 state attorneys general, along with a host of federal agencies, claiming that the proposal was unworkable and unfair.

House Republicans have also joined in by denouncing the program and questioning the legal authority for many of the actions proposed in the settlement proposal. Republican Senator Richard Shelby of Alabama calls the proposal a “shakedown.”

Tags: Wells Fargo, Bank of America, principal reduction, Freddie Mac, Fannie Mae, mortgage modification, mortgage settlement, loan principal