According to a letter sent by Massachusetts Attorney General Martha Coakley to the government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—the GSEs will be required to offer commercially reasonable loan modifications under Massachusetts’ recently passed loan modification statute. In the letter, Coakley also continued to urge the Federal Housing Finance Agency (FHFA) to reconsider its position and engage in principal reduction for struggling borrowers.
The letter was sent to Edward J. DeMarco, Acting Director of the FHFA. The Massachusetts law, signed by Gov. Deval Patrick on Aug. 3, requires creditors to take commercially reasonable steps to avoid foreclosure upon certain mortgage loans. Recently, the FHFA, conservator of both Fannie Mae and Freddie Mac, officially refused to practice principal forgiveness.
“We expect Fannie Mae and Freddie Mac, like all creditors, to comply with these statutory obligations as they conduct business in Massachusetts,” AG Coakley said in the letter. “Specifically, we expect that Fannie Mae and Freddie Mac will pursue common-sense loan modifications for borrowers when the economic benefits of a modified loan exceed the significant losses anticipated at foreclosure. These loan modifications are critical to assisting distressed homeowners, avoiding unnecessary foreclosures, and restoring a healthy economy in our Commonwealth.”
The letter both highlights the imperative nature of preventing unnecessary foreclosures and FHFA’s steadfast refusal to use principal reduction as a critical foreclosure avoidance tool.
FHFA recently decided not to implement the Home Affordable Modification Program Principle Reduction Alternative (HAMP PRA) after the agency’s own study concluded that “principal reduction leads to a 20 percent reduction in re-default probabilities as compared to a modification utilizing forbearance, and principal reduction leads to a 24 percent reduction in re-default probabilities as compared to a modification that receives payment reduction, but neither forgiveness nor forbearance.”
“This data demonstrates that, in appropriate cases, loan modifications providing principal forgiveness can help struggling homeowners avoid foreclosure, save taxpayers’ money, and work to stabilize the housing market—all stated goals of the FHFA,” AG Coakley said.
The conclusions drawn by the study are consistent with another analysis, completed by FHFA, in which the HAMP PRA could help up to 500,000 homeowners and save Fannie Mae and Freddie Mac up to $3.6 billion.
In February, AG Coakley urged the FHFA to engage in loan modifications guided by a net-present value analysis to help stabilize the housing market and economy. Later in April, AG Coakley and 10 other state attorneys general, sent a letter to Director DeMarco seeking relief for homeowners and argued that the failure to implement principal loan forgiveness harms struggling homeowners and investors.
