Fannie & Freddie Consider Principle Reduction
Posted by Don Dutton at Mar. 26, 2012
NPR and ProPublica Report GSEs Considering Principal Reduction
NPR and ProPublica reported Friday that Fannie Mae and Freddie Mac might consider principal reduction as a means to help underwater homeowners.
“NPR and ProPublica have learned that both firms have concluded that giving homeowners a big break on their mortgages would make good financial sense in many cases,” NPR stated in an article.
Edward DeMarco, acting director of the FHFA, has stood firm in his decision to not allow for principal reduction, despite mounting criticism from Democrats and petitioning from organizations to have DeMarco fired.
But, in a statement to ProPublica and NPR, ProPublica reported that DeMarco said, “As I have stated previously, FHFA is considering HAMP incentives for principal reduction and we have been having discussions with [Freddie and Fannie] and Treasury regarding our analysis.”
Despite the Treasury’s offer to provide incentives to the GSEs for administering principal reduction, DeMarco told lawmakers during a hearing on February 28 that “both companies have been reviewing principal forgiveness alternatives. Both advised me they do not believe that it is in the best interest of the companies to do so.”
While many contend that allowing the GSEs to apply principal reduction would help the housing market to recover and keep people from going into foreclosure, others argue that while 60 percent of all mortgages are owned or guaranteed by the GSEs, they account for roughly 29 percent of seriously delinquent loans.
Mark Calabria, director of financial regulation at the Cato Institute, showed support for the FHFA’s stance on principal reduction during a separate hearing March 15, where he pointed that GSE loans display a smaller percentage, just 9.9 percent of underwater loans, compared to private label securities, with 35.5 percent of loans underwater.
But, since principal reduction is considered as part of the HAMP modification, it has also been noted that the GSEs account for about half of all HAMP modifications.
During the fourth quarter of 2011, the FHFA reported about 19,500 HAMP trials became permanent modifications, which brought the total number of active HAMP permanent modifications to about 400,000.
Another argument used against principal reduction is its potential cost to taxpayers. FHFAs estimate is principal reduction will cost taxpayers $100 billion, in addition to the $180 billion rescuing the GSEs has cost already.