Calls for widespread principal reductions from Fannie Mae and Freddie Mac are basically moral arguments. Supporters says it just not fair for negative equity homeowners to suffer the loss of value alone. This is often used in tandem with a story of lender impropriety, thus exaggerating a homeowner’s exacerbation, in addition to the onerous mortgage burden.
FHFA acting director Ed DeMarco long resisted calls for Fannie and Freddie to implement relief to the above cases in the form of principal reduction.
In it’s fifth report to Congress, the FHFA explains that its approach is not one of morality, but of mathematics. Furthermore, it doesn’t even seem to help avoid foreclosure — a popular argument that is pro-principal reduction.
“In considering principal forgiveness, we compared tax payer losses from principal forgiveness versus principal forbearance, which is an alternate approach the Enterprises currently take,” the report states.
“We concluded principal forgiveness results in a lower net present value than principal forbearance,” the text continues.
So at this point, there are no plans to remodel the Home Affordable Modification Program Principal Reduction Alternative.
“We concluded the anticipated benefits do not outweigh the costs and risks,” the report states. “We concluded the HAMP alternative program did not clearly increase foreclosure avoidance while reducing costs to taxpayers relative to the approaches currently in place.”
The text is succinctly worded as the report states that Fannie and Freddie still face layers of risk. The FHFA, quite simply, does not want the government-sponsored enterprise to take any more on, all morality aside.
But, before homeowner advocacy groups and attorneys general rush to blame FHFA and renew calls for DeMarco’s head, take a moment to read the report, especially it’s three-part mission statement (especially number 1).
Number 1: FHFA has a statutory responsibility as conservator to preserve and conserve the assets and property of the regulated entities.
Number 2: The Enterprises continue to have the same mission and obligations as before conservatorship. FHFA must ensure that Fannie Mae and Freddie Mac maintain liquidity in the housing market during economic turbulence.
Number 3: Under the Emergency Economic Stabilization Act of 2008 (EESA), FHFA has a statutory responsibility to maximize assistance for homeowners to minimize foreclosures. Under EESA, FHFA must consider the net present value of any action undertaken to prevent foreclosures.
These three mandates control every aspect of the FHFA, the report states. And, these mandates were established by Congress.
So in the end, chance for change is decidedly small. Homeowners say principal reductions are moral. The FHFA says principal reductions are mathematical.
Turns out, principal reductions are actually political.