Fannie Mae & Freddie Mac considering mortgage principal reductions
Mortgage giants Fannie Mae and Freddie Mac are considering reducing loan principals for distressed homeowners who owe more than what their homes are worth.
Preliminary results from an updated analysis by the Federal Housing Finance Agency (FHFA) indicate that granting principal forgiveness for delinquent underwater borrowers could save Fannie and Freddie more than $1.7 billion compared to standard loan modifications.
Without any loan modifications, Fannie Mae and Freddie Mac stand to lose $63.7 billion from the foreclosures of 691,000 underwater homeowners who currently are delinquent and at risk of default. With standard loan modifications, Fannie and Freddie could reduce their losses to $55.5 billion. Adopting principal reduction could further lower Fannie and Freddie’s losses down to $53.7 billion.
However, the principal forgiveness program would require $3.8 billion of incentive payments from the Treasury Department, bringing the total taxpayer cost to $2.1 billion. The Treasury Department announced earlier this year that it will triple incentives for investors who agree to reduce principals for distressed borrowers. The increased incentives prompted the FHFA to re-evaluate its longstanding position against principal reduction.
FHFA is expected to complete its analysis in the next few weeks, according to Edward DeMarco, the agency’s acting director. The final results will likely determine whether Fannie Mae and Freddie Mac will adopt principal reduction as part of their foreclosure prevention efforts.
FHFA assumed conservatorship of Fannie Mae and Freddie Mac in September 2008 after the two government-sponsored enterprises suffered debilitating losses during the housing crisis. The FHFA’s congressional mandates are (1) to minimize taxpayer losses by protecting Fannie and Freddie’s assets, (2) to maximize assistance to distressed homeowners, and (3) to ensure stability in the housing finance market.
The issue of mortgage principal reduction illustrates how FHFA’s objectives can conflict with each other, leading to institutional paralysis that hamper efforts to help distressed homeowners and the housing recovery.
For example, DeMarco has long cited FHFA’s responsibility to minimize taxpayer losses as the chief reason why the agency would not allow Fannie Mae and Freddie Mac to reduce mortgage principals for underwater homeowners.
But historical data cited by the FHFA shows that homeowners who owe more than what their homes are worth are far more likely to default on their mortgages. High foreclosure rates drive down home values, which leaves more homeowners underwater in their mortgages and perpetuates a vicious cycle that hurts the housing recovery.
The FHFA’s steadfast stance against principal forgiveness has been widely criticized by Democratic lawmakers, such as Rep. Elijah Cummings (D-Md.) and Rep. John Tierney (D-Mass.).
In February, Cummings and Tierney wrote a letter to DeMarco pointing out that FHFA’s “own calculations prove that principal reduction programs prevent losses from occurring.”
“Wou have an historic opportunity to improve our nation’s fragile economy, to provide real assistance to millions of struggling homeowners, and to save American taxpayers billions of dollars in the process,” Cummings and Tierney wrote. “It is time for you either to seize this opportunity or to step aside.”
Visit MakingHomeAffordable.gov for more information on foreclosure prevention and loan modification efforts by the Treasury Department and Housing and Urban Development.
- WhatTheFolly.com: Transcript: FHFA Director Edward DeMarco on mortgage principal forgiveness
- Treasury.gov: Expanding our efforts to help more homeowners and strengthen hard-hit communities
- Treasury.gov: GSEs & Principal Reduction: How HAMP Helps More Underwater Homeowners
- Tierney.House.gov: Letter to Edward DeMarco dated Feb. 8, 2012 (PDF)
- Federal Housing Finance Agency: Addressing the weak housing market (PDF)
- C-SPAN.org: Video of Edward DeMarco’s remarks at the Brookings Institution’s panel on the weak housing market (April 10, 2012)
- WhatTheFolly.com: Former Fannie Mae & Freddie Mac executives charged with fraud