Are record-low interest rates masking high-cost mortgage lending?

Are record-low interest rates masking high-cost mortgage lending?

Five leading economists weigh in and the answer may surprise you

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Less than one-in-five GSE loans hold a second lien

Less than 18% of Fannie Mae and Freddie Mac mortgages have a second lien, according to industry estimates provided to HousingWire.

Both government-sponsored enterprises guarantee a combined 29.2 million home loans, meaning roughly 5.1 million have a second lien attached, according to the analysis.

Federal Housing Finance Agency Acting Director Edward DeMarco said in a recent interview with the Financial Times that a massive first-lien principal reduction initiative would unfairly push more borrower payments to the big banks that hold those seconds.

The Treasury Department is working on a proposal with the FHFA to provide even more taxpayer dollars to Fannie and Freddie to write down principal for delinquent first-lien borrowers.

Anthony Sanders, a professor of finance with George Mason University, said it would be interesting to know the average second lien sizes, but such information has eluded analysts.

"Yes it does deflate DeMarco's argument on a second bailout," Sanders said. "But it doesn't change his argument of firsts. I agree with him that forbearance dominates principal reductions."

The FHFA is also afraid such a program would incentivize borrowers who are current on their loan to default in order to take advantage of such a program. DeMarco said recently three-in-four underwater homeowners are still making their payments.

Internal analysis at the FHFA showed forbearance programs that reduce the monthly payment for borrowers, while extending loan terms are more beneficial and less costly to the GSEs.

However, analysts such as Laurie Goodman at Amherst Securities and officials within the Treasury believe how long a borrower stays current can hinge at severe loan-to-value ratios.

DeMarco said a decision would be made in April.

jprior@housingwire.com

@JonAPrior

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