FHFA refuses principal reduction for Fannie, Freddie
Federal Housing Finance Agency Acting Director Edward DeMarco will not allow principal reduction on Fannie Mae and Freddie Mac loans.
"Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today," DeMarco said in a statement Tuesday.
New FHFA analysis shows Fannie and Freddie would save $3.6 billion by writing down principal under the Home Affordable Modification Program.
After payouts from the program are factored in, taxpayers would save $1 billion if the government-supported agencies were allowed to participate, according to the analysis. Nearly 500,000 mortgages could be eligible for the program.
In a letter to Congress, DeMarco said the program could cost up to $90 million to implement and a year or more for mortgage servicers to get up to speed.
If half of the eligible borrowers go through the program, savings drop to roughly $500 million, according to the analysis.
"Experience indicates that the likelihood of successfully modifying and reinstating these loans is small so that the anticipated net benefit is likely to be much less than $500 million," DeMarco said.
Treasury Secretary Tim Geithner urged FHFA Acting Director Edward DeMarco in a letter Tuesday to allow Fannie and Freddie to participate in the program after FHFA provided the analysis to some members of Congress. He even offered to pay for implementation costs of the program.
"I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs," Geithner wrote. "In view of the clear benefits that the use of principal reduction by the GSEs would have for homeowners, the housing market and taxpayers, I urge you to reconsider this decision."
An FHFA spokeswoman did not immediately reply to requests for comment.
The Treasury tripled payments to investors this year for allowing principal to be reduced through HAMP.
Preliminary analysis released by the FHFA in April showed Fannie and Freddie could save up to $1.7 billion from defaults avoided. But Treasury was thought to send $3.8 billion in the higher incentives for the write-downs. The program would therefore cost taxpayers a net $2.1 billion.
According to a separate letter from Michael Stegman, counselor for housing finance policy at the Treasury, the FHFA applied the program to the entire GSE portfolio of underwater home loans in the original analysis.
Performed on a loan-by-loan basis, principal reduction would be applied on less than 500,000 Fannie and Freddie mortgages, compared to 700,000 in the preliminary analysis, Stegman wrote.
When the FHFA analyzed the program for the smaller pool size, it found Treasury payouts to the GSE to be $2.7 billion, not the $3.8 billion originally thought. Thus, the net benefit to taxpayers would be $1 billion after the $3.6 billion in savings to Fannie and Freddie is factored in. (Click on the graph below to expand.)
Less than 10% of the $29.9 billion Congress allocated to HAMP has been spent. Roughly 4 million Fannie and Freddie borrowers owe more on their mortgage than their home is worth. Most of them, however, are still current on their loans.
FHFA fears borrowers would strategically default in order to take advantage of the program, costing the GSEs even though they could otherwise afford their monthly payment.
Fewer than 19,000 strategic defaulters would offset the benefits of the program, DeMarco said in his letter.
Stegman wrote the program requires proof of a financial hardship and tests that show the write-down would be less costly to an investor than a standard modification.
"In essence, a borrower who defaults cannot be certain that he or she will obtain a HAMP modification, much less a HAMP modification with principal reduction," Stegman wrote. "Therefore, a borrower would take a substantial risk by deliberately defaulting: they would have to choose to damage their credit for years to come and perjure themselves on the chance that they would be found eligible for the program."