Taxpayer funds used for some principal reductions in California
Fewer than 9,000 borrowers will receive a principal reduction under an expanded program in California, according to state officials.
Last week, Fannie Mae and Freddie Mac confirmed participation in the Keep Your Home California program. The California Housing Finance Agency expanded the $2 billion initiative to use federal dollars to reduce up to $100,000 in principal for qualified borrowers.
The money comes through the Hardest Hit Fund, a $7.6 billion national effort began more than two years ago. Just 3% of the money has been spent as of Dec. 31, according to the Special Inspector General of the Troubled Asset Relief Program.
Evan Gerberding, assistant director of marketing at the California HFA, said roughly $772 million is set aside for principal reduction.
"Because we have no way of knowing what a Fannie, Freddie homeowner's individual financial situation is, it's very difficult to determine how many might qualify for our assistance," Gerberding said in a statement. "I can tell you, however, that under the new guidelines for our Principal Reduction Program, we'll be able to help about 9,000 struggling homeowners in California."
The effect on agency mortgage bond performance is expected to be minimal. The Federal Housing Finance Agency said neither Fannie nor Freddie will take losses on the write downs, because taxpayer dollars will take the place of borrower payments.
Still, California is a major drag on the Fannie Mae portfolio at least. Home prices dropped nearly 48% in California through the end of the first quarter, and roughly 19% of Fannie's unpaid principal balance resides in the Golden State, more than any other, according to a recent financial filing. The next highest percentage is Florida at 6.2% of the portfolio.
One GSE official said the effort in California doesn't necessarily mean the entities will welcome principal reduction. The California program effects mortgage bonds differently than modifications under other proposals. FHFA Acting Director Edward DeMarco released preliminary analysis last month showing an expanded Home Affordable Modification Program would be limited as well for the GSEs.
Such a program would be limited to less than 700,000 loans nationally. It would save the GSEs $1.7 billion but would cost taxpayers a net $2.8 billion. Because of this, DeMarco touted principal forbearance as a less costly but comparable alternative.