Government watchdog criticizes FHFA principal reduction delays
The Government Accountability Office found principal reduction would help some struggling homeowners and criticized the Federal Housing Finance Agency for delaying a decision to involve Fannie Mae and Freddie Mac in the effort, according to a report released Friday.
"Given the December 31, 2013, deadline for entry into a HAMP permanent loan modification and the lead time required for the enterprises to implement a principal forgiveness program, it is critical that FHFA take the steps needed to expeditiously make a decision about allowing the enterprises to engage in HAMP principal forgiveness modifications," the GAO said in its report.
In April, the FHFA released initial analysis of new Treasury Department incentives paying investors triple for reducing principal on Home Affordable Modification Program workouts. The agency found the GSEs would save roughly $1.7 billion, based on an analysis of 700,000 GSE loans with loan-to-value ratios above 115%.
Of the estimated 11 million underwater borrowers, roughly 2.5 million hold Fannie or Freddie mortgages at LTV ratios above 115%. According to the FHFA, 2 million of them are still current on their loans.
The FHFA fears some borrowers would strategically default to get the write-downs and force unnecessary principal reduction losses onto the GSEs. Should just 10% of the eventual pool strategically default, the losses would wipe out any savings from the program as a whole.
The FHFA was expected to provide a ruling on whether it would allow the GSEs to particpate in April, but the agency delayed the decision.
Meg Burns, senior associate director of housing policy at the FHFA, said the agency intends to release updated analysis "in the near future," but that it also expects just one-third of the 700,000 pool to would qualify given the critieria of the program.
"In its forthcoming release, FHFA will also discuss further the expense and risks of, and time required for, implementation of a modification program involving principal forgiveness," Burns wrote in a letter to the GAO. "A model-based economic analysis cannot address these crucial considerations."
But according to the GAO, time may be running out. Fannie Mae officials told the watchdog that installing such a program would cost "tens of millions of dollars" and take up to two years to fully implement.
The FHFA also argues although the GSEs could save up to $1.7 billion, the Treasury would have to spend $3.8 billion in incentive payments under the program, resulting in a net loss of $2.1 billion to taxpayers.
The GAO pointed out the money would come from more than $45 billion Treasury allocated under the Troubled Asset Relief Program approved by Congress.
Fannie analyzed, and according to some, prematurely killed two principal reduction programs in 2010. According to the GAO, Freddie Mac prepared estimates of the savings that principal forgiveness might provide using HAMP. Freddie found Treasury incentive payments could offsent $480 million in losses to the GSE from 100,000 borrowers with LTVs above 105%.
Some policy analysts believe FHFA will eventually do something by the end of the year.
"While the timeline has fallen well beyond our original thoughts, we remain committed to the belief that there will be principal reduction on government-backed loans in 2012," said Isaac Boltansky, an analyst at Compass Point.
As of December, households held $3.7 trillion more in debt than the equity in their homes nationwide, according to the GAO.
"GAO found some evidence to suggest that principal forgiveness could help some homeowners—those with significant negative equity—stay in their homes, but federal agencies and the enterprises were not using it consistently and some were not convinced of its merits," according to the report. "Despite their efforts, neither federal agencies nor nonfederal entities have been able to come up with a clear path for resolving the foreclosure crisis."