Homeowners facing potential foreclosure with mortgages backed by Fannie Mae and Freddie Mac will not be getting any principal-reduction bailouts, based on a decision announced this week by the Federal Housing Finance Agency.
Fannie Mae and Freddie Mac own or guarantee more than 50 percent of outstanding mortgages in this country.
While those at risk of foreclosure remain eligible for loan modifications that include significant interest-rate reductions, the much-debated idea of allowing a taxpayer-backed, principal reduction program was rejected.
Edward DeMarco, acting director of the FHFA, said an extensive analysis by his agency showed that the costs and risks of principal reduction far outweighed the benefit to homeowners.
Among those risks are a potential flood of new strategic defaults by underwater homeowners now current on their mortgage payments. According to the FHFA analysis, up to 248,000 homeowners would have been eligible for principal reductions from Fannie and Freddie. An estimated 11 million Americans owe more on their mortgages than their homes currently are worth.
Taxpayers already have spent an estimated $170-$180 billion on Fannie and Freddie since 2008 because of bad mortgage loans, stemming from a faulty business model by the two government-sponsored enterprises. Fannie and Freddie have been operating under the FHFA conservatorship since the 2008 rescue.
“Nearly all of this benefit is simply a transfer from the taxpayers to the enterprises, which would add to the … support the enterprises have already received,” DeMarco wrote. “Under other reasonable assumptions, implementing (principal forgiveness) would actually increase taxpayer costs.”
White House Displeased
White House officials expressed displeasure at the decision by the FHFA, which operates independently of the executive branch of government.
“I do not believe it (this decision) is the best decision for the country,” Treasury Secretary Timothy Geithner said in a letter to DeMarco, urging him to reconsider.
Geithner believes that by allowing “targeted” reductions of principal for troubled borrowers, it would help accelerate the country’s recovery from the housing-market debacle. It would increase home equity, putting the borrower closer to a home value that would equal or exceed the loan, also making it easier to sell.
The Treasury Department previously said that it would cover a part of the cost of principal reduction for Fannie and Freddie during mortgage modifications. It would have used money from the $700 billion Troubled Asset Relief Program (TARP).
DeMarco rejected that offer, worried that it would entice underwater borrowers to stop making their payments to become eligible, leading to deeper losses for Fannie and Freddie.
Other Mortgage Modifications Include Principal Reduction
Principal reduction is being used by some private lenders during loan modifications. According to mortgage research firm Amherst Securities Group, 40 percent of the modifications without Fannie or Freddie backing included principal reduction terms.
To encourage lenders to use principal forgiveness, the Treasury Department in January tripled the incentive payments it gave mortgage investors as part of the Home Affordable Modification Program. The Treasury also made that offer to Fannie and Freddie, and the FHFA debated the issue before the recent announcement.
Florida, California, Michigan and Illinois lead the country in the number of homeowners whose outstanding loans are larger than the value of their homes, according to FHFA.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at email@example.com.
- Podmolik, M. (2012, August 1). Fannie and Freddie reject mortgage loan forgiveness. Chicago Tribune. Retrieved from http://www.chicagotribune.com/business/ct-biz-0801-fannie-freddie-20120801,0,6322482.story
- Gordon, M. (2012, August 1). Fannie, Freddie still barred from cutting principal. The Associated Press. Retrieved from http://bostonglobe.com/
- Weisenthal, J. (2012, July 31). Fannie and Freddie Will Not Let Homeowners Write Down Principal. Business Insider. Retrieved from http://www.businessinsider.com/fannie-mae-and-freddie-mac-will-not-write-down-mortgages-2012-7