On Tuesday, the Federal Housing Finance Agency (FHFA) stated that it would not endorse programs at the government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—to write down mortgage principal for underwater borrowers.
"Today, I provided a response to numerous congressional inquiries as to whether the FHFA would direct Fannie Mae and Freddie Mac to implement the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA)," said Edward J. DeMarco, Acting Director of the FHFA. "After extensive analysis of the revised HAMP PRA, including the determination by the U.S. Department of the Treasury to begin using Troubled Asset Relief Program (TARP) funds to make incentive payments to Fannie Mae and Freddie Mac, FHFA has concluded that the anticipated benefits do not outweigh the costs and risks. 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."
Nearly 60 percent of all U.S. mortgages are guaranteed by the GSEs and nearly 11 million homeowners are faced with negative equity in their homes.
“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," said David H. Stevens, president and chief executive officer of the Mortgage Bankers Association (MBA). "We agree that principal forbearance can help borrowers realize a payment reduction in a similar way as principal reduction. It is critical to implement solutions that help the American homeowner without incurring the negative long-term impact of making credit less available and more expensive."
Timothy F. Geithner, Secretary of the U.S. Department of the Treasury, expressed concern over what he described as the FHFA's "continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs."
In a letter to DeMarco, Geithner asks the FHFA to reconsider its stance on principal reduction, and offered support to the FHFA to provide any additional support to make a targeted principal reduction program at the GSEs successful.
"Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes, and the legacy of the crisis continues to weigh on the market," said Geithner. "You have the power to help more struggling homeowners and heal the remaining damage from the housing crisis. I hope you will move to address these problems with a sense of urgency and force commensurate with the scale of the remaining challenges."
“Looking forward, we need to ensure that credit is available for potential homebuyers, and this is at risk with forthcoming regulations regarding the QM/Ability to Repay rule," said Stevens. "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."