Treasury Department officials are narrowing the range where they think principal reduction could work for the government-sponsored enterprises.
The Federal Housing Finance Agency is analyzing how much principal reduction under a revamped Home Affordable Modification Program could cost or save Fannie Mae and Freddie Mac. The results are expected in the next few weeks, according to several sources. Meanwhile, 11 million borrowers are underwater, and roughly 4 million of them hold Fannie or Freddie mortgages.
The Treasury is pressing for their involvement. And in January, officials tripled incentives paid to investors that allow a principal reduction on a HAMP modification.
"We think there is a set of cases where it is clearly in the interest of the taxpayer to do principal reduction," Treasury Secretary Timothy Geithner told a House subcommittee Wednesday. "It is not an overwhelming number, but where it makes sense we should do it."
Darius Kingsley, chief of homeownership preservation office at the Treasury, said in an interview Wednesday they're finding the best results would come from borrowers above 120% loan-to-value ratios who can prove some type of hardship.
"There are a lot of academic studies that show when you talk to homeowners about whether or not they feel like an owner again, and whether or not they have a shot at regaining equity, the threshold is about 110% LTV to 120% LTV. For many homeowners, if you go over that percentage, they often feel they've become a renter, not an owner," Kingsley said. "There are a lot of hardships facing struggling homeowners. Many of them have to do with unemployment. Even if you're rehired, the new job could pay less, and that can be a hardship. There are different things that come up in people's lives."
FHFA Acting Director Edward DeMarco said in a recent interview with the Financial Times that several hurdles remain. Notably, he said, reducing the first lien without addressing a second would unfairly push more dollars to the big banks that hold those positions. Reducing the monthly payment instead would be just as good a deal at a fraction of the cost, he said.
But included in the January changes to HAMP, the Treasury also increased incentives under the second-lien write-down program called 2MP, which Fannie and Freddie directed its servicers to participate in more than one year ago. The top-five servicers that participate in the program hold about 60% of all outstanding second-liens eligible for the program.
Through January, participating servicers reduced principal on first liens in 67,800 HAMP trials. Of the non-GSE trials started in January alone, 46% involved some principal reduction. Under 2MP, a servicer must offer a proportionate write-down of the second-lien if it has the authority to. Servicers started more than 71,000 modifications of second-liens under 2MP with more than 15,000 fully extinguished.
"From a first lien holder's point of view, it might not make sense to write down the first lien if the second lien holder does not reduce at least a proportionate amount of principal," Kingsley said. "Just from a fairness point of view. But there are a lot of GSE loans that don't have second liens."
Edward Mills, research analyst at FBR Capital Markets said the gap between Treasury and the FHFA is large, but that it is each other's best interest to find some common ground.
"What we have heard is that Treasury absolutely wants this to happen, but DeMarco is still completely unsold," Mills said in an interview. "You have a situation where you ultimately will be able to figure out a program, but it's certainly going to be limited. For political reasons it behooves both parties to figure it out and get something done rather than maintain the current stasis here."
But it's easier said than done. It's still unknown how many GSE mortgages even have a second lien, Mills said. And DeMarco is convinced redefault rates on forbearance plans and principal reduction plans are similar. But the biggest unknown is how much moral hazard a program could create. HAMP is for delinquent borrowers, and doing GSE principal reduction under the program could convince some to stragetically default on their loan.
There are signs the gap could be narrowing, though. At a REThink Symposium panel hosted by HousingWire Editor Jacob Gaffney, the current Freddie Mac CEO Charles "Ed" Haldeman admitted the new incentives from the Treasury could likely make it in their best interest to write down principal in some, specifically targeted areas.
"Between HAMP, HARP, the AG settlement, there are a set of options for every single borrower regardless of who originated your loan," Mills said. "There is something that can be done, with the exception of no principal reduction on GSE loans. When you have an outlier like that, that creates a problem."
Kingsley believes the principal reduction program under HAMP is misunderstood. Any reduction done, he reiterated would be specific and simply not for everyone.
"People who are opposed to principal reduction to begin with, often confuse HAMP with a mass principal write-down program. Other people think that because of the number of badly originated loans that so many were steered into, we should right a wrong and give everyone principal reduction," Kingsley said. "The fact is that principal reduction isn't right for everyone, but it is a steadily increasing percentage of our modifications, and servicers are finding it can work for some."