In prepared remarks today, Acting Federal Housing Finance Agency (FHFA) Director Edward DeMarco said his preliminary thoughts on using Treasury incentives to offer principal forgiveness to underwater borrowers.
Bank of America Merrill Lynch analysts said in a report that was just released this morning that DeMarco effectively said no to the idea of a broad-based principal forgiveness by Fannie Mae and Freddie Mac.
Analysts concluded from DeMarco's preliminary statements on the topic that there will be zero to minimal scale of such an approach being implemented.
DeMarco had cited three key factors in his analysis. The first is the net present value (NPV) impact to taxpayer. The Treasury incentive payments, according to DeMarco, will be
seen as an offset to the NPV benefits of a principal reduction modification.
He also noted the factor of borrower incentives. BofA Merrill analysts said that this is the moral hazard issue related with principal forgiveness.
DeMarco noted that less than 1 million of the 11 million underwater borrowers would benefit from forgiveness. He singled out a specific concern regarding keeping the remaining borrowers current on their mortgages, most of whom have always been current. He also explicitly stated his concern
regarding giving these borrowers the motive to claim hardship or go delinquent on their loans.
Another aspect that DeMarco brought up was the operational costs. He noted that forgiveness guidelines will have to be clearly rolled out to over 1000 servicers and that there would be costs
that are related to this endeavor.
Furthermore, BofA Merrill analysts reported that DeMarco cited opportunity costs compared with the other retention programs, including the Home Affordable Refinance Program. These operational costs should be considered in the benefit analysis involving principal forgiveness.
The FHFA acting director clearly prefers forbearance over forgiveness, analysts said. He said that forbearance is effectively a "shared appreciation mortgage" that has far fewer operational complexities versus an explicit shared appreciation mortgage. He also stated that he would like to conclude discussions on principal forgiveness over the next few weeks.
