A massive principal reduction program applied to underwater loans held by Fannie Mae
and Freddie Mac
would cost the mortgage giants more than $100 billion, according to an analysis released by the Federal Housing Finance Agency
The FHFA disclosed the analysis conducted in 2010 in response to Democrats requests
made last week. They asked House oversight committee chair Rep. Darrell Issa, R-Calif., to subpoena the agency since it failed to send the analysis as requested last year.
FHFA Acting Director Edward DeMarco has long said a principal reduction program on GSE loans would cost taxpayers too much. As of the end of the third quarter, Fannie and Freddie already owe a combined $151 billion in bailouts to the government.
"Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action," DeMarco said in a letter
sent to Rep. Elijah Cummings, D-Md., on Friday.
The analysis was conducted by several directors at the FHFA. Some of those directors, according to the document provided to HousingWire, were even in favor of such a program before looking at the numbers.
"Interestingly, some key team members believed principal reduction would be effective, and approached the task from the perspective of how to demonstrate that such a measure would reduce losses at the GSEs and help to realign the outstanding mortgage debt and home values," according to the report DeMarco attached to his letter.
The analysts used the same net-present-value test in the Home Affordable Modification Program, which determines whether it is less costly to conduct the workout or foreclose. Of the 30 million mortgages guaranteed by the enterprises, roughly 3 million at the time of the analysis were underwater, and of this 3 million, about 80%, are still current on the loan.
DeMarco noted that the ratio of negative equity mortgages on private-label securities is much worse. As of June 2011, roughly 35.5% of private-label mortgages were underwater, according to the report.
The analysts looked at what reducing the principal for these borrowers down to a 115% loan-to-value ratio would do the GSE books compared to simply forbearing the same amount.
At Fannie, more than $27 billion in principal would need to be forgiven on its $192 billion in severely underwater mortgages, resulting in a $63.4 billion loss. Reducing $14.8 billion in principal on Freddie's $111 billion in underwater loans would cause $38.3 billion in losses, according to the analysis.
Forbearance, comparatively, showed marginally lower losses. It also creates greater cashflow to investors and is easier on the balance sheet when it comes to accounting. If principal reduction is granted to performing loans — which GSE accountants have not reserved for — the losses would be immediate. Principal forbearance, the analysts concluded, creates no additional accounting losses and allows the GSEs to recover the principal at some later point.
The FHFA did retool
the Home Affordable Refinance Program as the report suggsests: "Clearly, the HARP program has been underutilized to date, suggesting that the program features should be revisited to remove barriers to entry wherever possible."
Principal reduction, on the other hand, remains elusive.
In the third quarter of 2011, servicers cut principal on 10,722 modifications, roughly 7.8% of all workouts during the period, according to the Office of the Comptroller of the Currency
"FHFA remains committed to assisting homeowners to stay in their homes and will continue to update and improve our analysis," DeMarco wrote. "FHFA would reconsider its conclusions if other funds become available and if the availability of other funds is at a level that would change the analysis to indicate potential savings to the taxpayers."
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