Mortgages Blog

Finance Blogs » Mortgages Blog » DeMarco reconsiders loan reduction

DeMarco reconsiders loan reduction

By Polyana da Costa ·
Tuesday, April 10, 2012
Posted: 12 pm ET

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?

Twitter @Polyanad

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
May 02, 2012 at 6:30 pm

The one thing I can not understand is why is it ok to do a short sale, just not back to the current owners or anyone related! This particular rule just feels like there is some malicious guber making up this rules and gets off at making people miserable. The simple answer is, and has been for couple of years now, that the only way to really deal w/the problem is to force short-sale streamline refis. There is plenty of unused money from TARP and other failed semi-programs based on banks volunteering (aha!) to do the right thing to insure the new loans.

Principal equalization (to market) or forgiveness addresses part of the problem and is a step in the right direction. Forbearance is just plain silly. And DeMarco is right that no-one benefits from it.

April 11, 2012 at 4:34 pm

I am not underwater so far I asked wells fargo if the like to rewrite the loan balance for a new 30 year loan at prevailing rate (mY RATE IS 7.5%) I was told go get a new mortgage from other sources, Unfortunatly my business died and I don't qualify thru regular qualifieng ratios 28/36 etc... If a person is able to pay higher mortgage payment it is obvious they can pay much lower payments beside that the 3 units cover PITI = PRINCIPAL,INTEREST, TAX, INSURANCE. The whole think is STINKS.

April 10, 2012 at 9:03 pm

My own situation has been unbelievable, as I had a divorce, and then a sewage flood, then $25K in dry rot damage to home. It is now under water for $100K+ and I am listing it for short sale. I have made 100+ phone calls to everyone and anyone who would listen and no one can help me. I give up. Negative equity, no relief, no end in my lifetime. No thanks!!

April 10, 2012 at 3:35 pm

I tried to refinance but was told I would need PMI insurance because I lost so much equity. I declined but it just made me mad as i have been current and paid on time and my loan is with Fannie already. I think we the taxpayers should force them to automatically reduce to lower interest rate if currently one percent or lower then what we have our loans with them now.

April 10, 2012 at 3:28 pm

How do you walk away and have it not affect your credit? And then buy another home a couple years later? Doesn't seem possible unless I am missing some information.

April 10, 2012 at 1:28 pm

I am a current, underwater home owner. My neighbor just purchased his house two weeks ago for approx. $100,000 cheaper than mine. His house is approx. 2900 ft2, and mine is 2200 ft2. After our introduction and a brief discussion, here is what I found out. He walked away from his house several years ago because he was underwater. He didn't loose his job or have some other financial disaster. he just walked away because it made financial sense. In his opinion he would never recoup the cost. (I agree with him)
I tried over the last 2/3 years to get a modification and the answer was an overwhelming NO! I have been thinking about doing the same thing my neighbor did. These idiotic, bloated politicians who just want to help those who are DELINQUENT must be smoking crack.
If this new program gets approval, then it would make NO sense for any current homeowner to continue making payments. What would the government do if all 2 million homeowners stopped making payments?