Ed DeMarco, acting director of the Federal Housing Finance Agency (FHFA), said Tuesday that struggling borrowers whose loans are owned by Fannie Mae and Freddie Mac will not be allowed to wipe out part of their mortgages under a government program, defying pressure from the Obama administration and top Democratic lawmakers.
"Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today," DeMarco said.
The FHFA has long resisted plans to forgive borrowers' mortgages, but the administration ramped up pressure on DeMarco to change his mind in January, formally asking the agency to reexamine its position based on a new set of incentives included under the Obama administration's Home Affordable Modification Program.
The White House and top Democrats, including Rep. Barney Frank, the ranking member of the House Financial Services Committee, had repeatedly pushed DeMarco to reverse course. The Obama administration had hoped significant changes to the Hamp program would allow at least a million more borrowers to refinance their homes to reduce their monthly payments.
Treasury Secretary Tim Geithner immediately objected to the decision on Tuesday, writing to DeMarco that he was "concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs."
"You have the sole legal authority to make this decision," Geithner wrote. "However, I do not believe it is the best decision for the country, because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation's housing market, and result in a net benefit to taxpayers."
Geithner said FHFA's own analysis shows that permitting principal reduction could help save the GSEs $3.6 billion and taxpayers as much as $1 billion.
Principal reductions have emerged as a crucial issue in efforts to work out troubled loans threatened by foreclosure. An array of experts and officials have cited research showing write-downs as perhaps the only broad-based way to resolve bad credits short of mass foreclosures. But the government-sponsored enterprises, as well as others in the industry, have resisted such reductions.
DeMarco he has repeatedly tried to make the case that he has dueling priorities — one of which is to protect the taxpayer from any future losses. He has expressed concern that such a principal reduction program would create a disparity for those borrowers who are paying on time and potentially create an incentive for homeowners to default.
According to the agency's analysis, the benefits to taxpayers could either be positive or negative depending on the borrowers' current debt-to-income ratios and various modeling used by the FHFA.
In the best case scenario, the projected taxpayer benefit would be anywhere between $100 million to $500 million, while potentially aiding 74,000 to 248,000 borrowers, who are already eligible for the standard Hamp modification, which would give them the same reduced payments.
But the agency said it found there were a number of associated costs and risks that would offset any of these potential benefits.
For example, implementing such programs at Fannie and Freddie would cost roughly $70 million to $90 million, plus impose expenses on thousands of servicers. Staff resources would have to be diverted from current loss mitigation activities to develop the program.
More importantly, the agency found that if only 3,000 to 19,000 borrowers, who are current on their mortgage today, defaulted on their monthly payments in the hopes of having access to the principal reduction program, it would offset all taxpayer benefits.
Reaction to the FHFA's announcement was shift with the Mortgage Bankers Association (MBA) giving a thumbs up the agency's stance.
“FHFA has made the determination that the long-term national costs of a widespread principal reduction program are unlikely to outweigh what may be a short-term gain for a few select borrowers in certain states," David Stevens, president and CEO of the MBA. "We agree that principal forbearance can help borrowers realize a payment reduction in a similar way as principal reduction."
The MBA said that it is critical to implement solutions that help the American homeowner without making credit less available and more expensive, which is a possible long-term effect of principal reduction.
“We continue to express strong support for other actions the FHFA has taken to support the housing market, notably the [Home Affordable Refinance Program], which has lowered mortgage payments for more than a million underwater homeowners who have continued to make their payments through this tough time.
Stevens added that credit availability for potential homebuyers needs to be ensured. This is at risk with upcoming regulations including the Qualified Mortgage/Ability to Repay rule. "Only when access to credit normalizes, will the housing market start growing again, and it is that market growth, and increasing home values, that will truly help underwater borrowers,” he said.