The Federal Housing Finance Agency (FHFA) continues to receive pressure from Democrats and housing advocates to principal reductions on mortgages held by Fannie Mae and Freddie Mac. A study completed by Fannie Mae and Freddie Mac reveals that hundreds of thousands of borrowers with underwater mortgages can receive financial relief and Fannie and Freddie can save money through a principal reduction program.
FHFA’s acting director of FHFA Edward J. DeMarco has resisted efforts by the Obama administration to permit principal reductions for loans owned or insured by Fannie Mae and Freddie Mac. However, the analysis conclusion on the impact of a principal reduction program has the acting director reconsidering his position on the issue.
In a recent speech given to the Brookings Institute, DeMarco made opening remarks, which concisely phrases the question everyone has been asking about principal reduction.
“Would homeowners, the housing market, and the taxpayer be best served by providing outright forgiveness of mortgage debt for certain homeowners who currently owe more on their mortgage than their house is worth today?”
FHFA Reluctance to Principal Reduction
Mr. DeMarco believes that opening the door to principal reductions for trouble homeowners may encourage the more than 2 million homeowners, who have managed to keep their mortgages current, to fall behind on their payment to qualify themselves for principal reductions.
Furthermore, says DeMarco, the biggest concern involves this larger group of homeowners who have underwater mortgages, but “faithfully” continued to pay their mortgages represents the greatest risk to the housing market. If these homeowners default on their mortgages, it would have a severe effect on the housing market compared to allowing principal forgiveness.
Even if the FHFA acquiesces and decides to allow Fannie Mae and Freddie Mac to offer homeowners a principal reduction program, DeMarco says that only 600,000 homeowners will qualify for the program. The initiative would work for homeowners who are behind in their mortgage payments and who have balances that exceed more than 115% of the value of their home.
Based on the analysis, 691,000 eligible borrowers would reduce Fannie and Freddie’s potential losses by $1.7 billion. The Treasury Department will pay principal reduction incentives of $ 3.8 billion, resulting in a $2.1 billion loss to the public.
Other Options to Principal Reduction
The acting director points out that homeowners who have kept their mortgages current, have homes worth less than the balance on their loans, can apply for other government refinance mortgage programs, such as Home Affordable Refinance Program (HARP) or the or FHA streamline refinance mortgage program.
The FHFA also provides the Home Affordable Modification Program (HAMP) for homeowners, which reduces their monthly mortgage payments or offers favorable terms on their home loans. The FHFA reports claim it has processed over 1.1 million loan modifications between HAMP and other initiatives.
FHFA Supports Principal Forbearance
Demarco stresses that the Federal Housing Finance Agency has a statutory duty to “conserve the assets” of Fannie and Freddie and minimize “losses” to the American taxpayer. The agency also has the mission of ensuring a liquid market for mortgage financing, a stable housing industry and assist homeowners.
The FHFA has held fast to the approach of having homeowners who have delinquent mortgage payments and underwater mortgages enter into principal forbearance programs currently offered by Fannie Mae and Freddie Mac. This program allows a lender to defer the mortgage payments for the underwater portion of the mortgage. When a homeowner refinances the mortgage or sells the home, the borrower pays the underwater portion of the loan out of the proceeds. The FHFA does not charge the borrower interest on the deferred portion of the mortgage.
Housing advocates have supported the concept of principal reduction as a vital component for stabilizing the housing market because it lowers the mortgage balances for borrowers who owe more than the current values of their homes. Over the last year or more, supporters of principal reduction have pushed the FHFA to change its position on the issue. The FHFA intends to make a decision on principal reduction sometimes within the next two weeks.