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Servicing

FHFA delays principal reduction ruling

The Federal Housing Finance Agency delayed its decision to allow principal reduction on Fannie Mae and Freddie Mac mortgages.

American Banker first reported the development Friday. A spokesperson confirmed the delay.

"FHFA continues to work on its principal forgiveness analysis and is in discussions with the Department of Treasury. A final determination on the Treasury proposal for triple investor incentives for (Home Affordable Modification Program) Principal Reduction Alternative is being deferred until we conclude these activities," the spokesperson said.

The Treasury expanded HAMP in January in an effort to boost principal write-downs. Preliminary study results from the FHFA earlier in the month showed the higher incentives could save Fannie and Freddie up to $1.7 billion.

But FHFA Acting Director Edward DeMarco said such a program could only be limited to roughly 700,000 loans. Taxpayers subsidizing the GSEs for the reductions would still lose $2.1 billion. Only a small percentage of borrowers still current on their loan would have to strategically default to offset any savings to Fannie and Freddie, according to the study.

Policy analysts and insiders are split on what the FHFA may ultimately do.

"DeMarco went to great lengths to detail operational difficulties in implementing this program," said Isaac Boltansky, an analyst at Compass Point. "In our view, this delay is likely due to increased scrutiny of the full analysis by the Treasury Department in advance of its release and continued pressure from administration officials."

DeMarco has long favored principal forbearance to reduce monthly payments for borrowers instead of writing off the principal entirely. In his speech earlier in the month, he said it could be considered as comparable shared appreciation program.

Ed Mills, an analyst at FBR Capital Markets, said there is some desire in Washington to strike a balance that would avoid a wide principal reduction program but allow servicers to use it where it makes sense. The problem is, it will take time.

"One of the concerns is the FHFA is doing this analysis on a very macro level. There are clearly times where forgiveness can work on a loan-by-loan basis, but it's a tougher call if you did it across the board," Mills said. "This is complicated analysis. It's difficult to know all the factors."

jprior@housingwire.com

@JonAPrior

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