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No Principal Reductions for Fannie Mae, Freddie Mac Borrowers

Financially strapped borrowers whose mortgages are backed by Fannie Mae and Freddie Mac will not be allowed principal reductions to help save their homes from foreclosure, a decision that will impact consumers as well as communities.

Federal Housing Finance Agency acting Director Edward DeMarco said Tuesday that forgiving a portion of the amount due on a mortgage, one component of the federal government’s home mortgage modification program, “would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers.”

Since September 2008, Fannie and Freddie have been operating under the conservatorship of the housing finance agency.

Fannie Mae and Freddie Mac own or guarantee more than 50 percent of outstanding mortgages, a market valued at $10 trillion. During the first quarter, 3.7 percent of Fannie Mae’s outstanding mortgages and 3.5 percent of Freddie Mac’s were seriously delinquent, meaning payments were at least 90 days past due and foreclosure proceedings could be initiated.

In January, the Treasury Department tried to boost the use of principal forgiveness by announcing it would triple the incentive payments it gave mortgage investors that agreed to reduce outstanding loan balances as part of the government’s Home Affordable Modification Program. The Treasury also offered to extend those incentive payments to Fannie and Freddie. For months, the housing finance agency had said it was considering it.

DeMarco said Tuesday that 74,000 to 248,000 Fannie and Freddie borrowers could be eligible for modifications that included principal forgiveness.

“However, nearly all of this benefit is simply a transfer from the taxpayers to the enterprises, which would add to the over $188 billion in taxpayer support the enterprises have already received,” DeMarco wrote. “Under other reasonable assumptions, implementing (principal forgiveness) would actually increase taxpayer costs.”

DeMarco also noted that if the two government-sponsored enterprises were to offer principal reductions, they would have to widely publicize it and publish rules for more than 1,000 mortgage servicers. That could entice underwater borrowers who are current on their mortgage to stop making their payments to become eligible, leading to further losses…

Read more: Chicago Tribune

 

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