All of this talk about Fannie Mae and Freddie Mac reconsidering principal reductions seems to be leaving out one major thing: Taxpayers.
Wasn’t it the stance of Ed DeMarco, acting head of the Federal Housing Finance Agency that doing principal reductions was bad because it left taxpayers on the hook? Wasn’t that his biggest reason for saying “no” to principal reductions for the last several months?
Maybe he should have gotten Fannie and Freddie on message.
The both of them are now reconsidering principal reductions due to an announcement by the Treasury that it would triple incentives for mortgage investors to do principal reductions.
"I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us," Freddie Mac CEO Charles "Ed" Haldeman said at HousingWire's REThink Symposium. "We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments — which could be 50% of what you could write down — it may be in our economic self-interest to participate in that."
The Treasury paid between $0.06 and $0.21 to the investors for each dollar forgiven under HAMP, but under the changes that will grow to between $0.18 and $0.63 cents. And those dollars start to add up, since about 4 million Fannie and Freddie loans are currently underwater.
As Capital Economics pointed out on Friday: “Of course, given that HAMP is taxpayer funded, there is no difference in the final cost to the taxpayer. And because Fannie and Freddie will probably have to seek additional bailout money from the Treasury to fund the part not covered by HAMP, the taxpayer would probably bear the entire cost.”
Principal reduction requires Fannie and Freddie to take large initial hits, but has great results in terms of getting the rest of the money back and even potentially making slightly more if the house appreciates in value. In recent testimony before the U.S. Senate Subcommittee on Housing, Transportation and Community Development, Laurie Goodman, senior managing director at Amherst Securities, called principal reductions the “most effective type of modification” as they have the highest success rate when compared to interest rate or capitalization modifications.
So, if Fannie and Freddie can cut those initial losses while still benefiting in the long run, giving in to the Treasury’s temptations would certainly be a good business move.
So it seems good business sense may be outweighing that supposed need to protect taxpayers from being a never-ending pocketbook.
But should taxpayers be put on the hook at all?
“We should never forget that the taxpayer has already poured $180 billion in the rescue of Fannie Mae and Freddie Mac,” said Mark Calabria, the director of financial regulation studies at the Cato Institute, who recently testified before the United States Senate.
That’s a lot of taxpayer dollars, and more will be added with principal reduction — even if that money comes through taxpayer dollars given to the Treasury instead of taxpayer dollars given to Fannie and Freddie.
To solve the problem of taxpayers being drained, Calabria testified that Fannie and Freddie should immediately be moved out of conservatorship and into receivership so that they can bear the brunt of their own losses. After all, they are investors.
In an email exchange with him, he said the revelations about Fannie and Freddie’s new outlook on principal reduction would still leave taxpayers on the hook, and that’s a problem.
“I think it greatly increases the odds of it happening. But obviously it leaves the taxpayer in the same situation — still taking the loss,” he wrote.
But the Center for American Progress takes the opposite approach. They say its time to spend money now to save money later.
“But it’s important to realize that over the long run, the government-sponsored enterprises are projected to lose even more money if they don’t act today. And more than three years into the conservatorship, with no clear path for the federal government to wind down its control of Fannie and Freddie anytime soon, we need to start thinking long term,” they say.
They point out the FHFA’s own analysis which says principal reduction would save “them approximately $20 billion over the life of those loans relative to not doing anything.” But I guess that’s the point: Relative to not doing anything.
The FHFA, Fannie and Freddie are, in fact, doing something. As DeMarco has painstakingly pointed out, they are doing interest rate and capitalization modifications, so studies that pit the stats of principal reduction against letting homeowners just ride it out are functionally pointless.
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