Has the administration persuaded Fannie Mae and Freddie Mac to help underwater borrowers modify mortgages through partial loan forgiveness?
Not yet. But Ed DeMarco, the Federal Housing Finance Agency's acting director who oversees the agencies, has gone from "no" to "maybe" on the issue. He says the FHFA is conducting a second analysis to determine whether it would be feasible for Fannie and Freddie to reduce loan balances on about 690,000 mortgages that are delinquent and deeply underwater. DeMarco says the analysis will be wrapped up in a few weeks.
The administration has long pushed Fannie and Freddie to embrace partial loan forgiveness to help borrowers who are underwater. DeMarco has strongly opposed such a program and recently presented a study that showed a principal reduction program would cost taxpayers billions of dollars.
The study was strongly criticized and its accuracy was questioned. Since then, DeMarco has given principal reduction a second thought. His attitude changed after the administration said it could force the agencies to get on board with principal write-downs.
To add to the pressure to embrace principal reduction, the administration says Treasury is willing to offset some of Fannie's and Freddie's losses by tripling the incentives offered to the agencies. The money would come from billions of dollars in unused Troubled Asset Relief Program funds, which were set aside in 2008 to help troubled banks. The loan reductions, or write-downs, would be offered on loans that qualify for HAMP, or the Home Affordable Modification Program.
"The FHFA is still in the process of analyzing whether it will participate in HAMP with triple incentives from Treasury," DeMarco said today during an event at the Brookings Institution in Washington, D.C.
While "maybe" is better than a straight "no," it still seems far from a "yes."
DeMarco says a principal reduction program wouldn't be effective and it could anger about 2 million borrowers who owe more on their mortgages than their homes are worth but have continued to make payments.
"This is not about some huge difference-making program that will rescue the housing market," he says.
He says of the 2.6 million deeply underwater loans owned by Fannie and Freddie, about 690,000 loans are delinquent.
This "is about maximizing assistance to 700,000 homeowners, while minimizing the costs to taxpayers," he says.
He fears the 2 million borrowers who are underwater but current on their mortgages would be encouraged to stop making payments to benefit from the principal reduction program.
DeMarco says a more effective option is principal forbearance, in which the underwater portion of the loan is temporarily set aside so it's not included in the borrower's monthly payment. When the borrower refinances or sells the home, the set-aside portion is added back to the loan total. He says HAMP is already using the forbearance program, but I have never heard of a homeowner who benefited from it.
What’s your opinion on mortgage loan forgiveness? Do you think it would help the housing market?