The housing regulator overseeing Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) on Wednesday said a final decision is expected later this month on whether or not it will implement an Obama administration plan that forces the two companies to reduce the principal value of mortgages they hold.
Federal Housing Finance Agency Acting Director Edward DeMarco has blocked Fannie and Freddie from reducing principal, saying it would drive up the cost of a taxpayer bailout that has topped $150 billion.
"It has been well-publicized that there is one form of loan modification that FHFA has not embraced, that being principal forgiveness," DeMarco said in a prepared speech before the Boston Security Analysts Society.
FHFA, under heavy pressure from Democrats in the U.S. Congress to change its position, is considering financial incentives offered by the White House to help offset any increased costs Fannie Mae and Freddie Mac might face if they wrote off debt on homes that have lost value. The U.S. Treasury Department's financial bailout would be applied to those costs, and the loan forgiveness would be carried out under the administration's signature Home Affordable Mortgage Program.
"We are currently evaluating the recent Treasury Department proposal to HAMP regarding principal forgiveness and expect a decision this month," DeMarco said.
About 11 million U.S. homeowners are "underwater" - meaning they owe more on their mortgage than their home is worth - and borrowers have lost about $7 trillion in wealth since the housing bubble began to burst in 2006.
DeMarco has long argued it doesn't make sense to push Fannie Mae and Freddie Mac to reduce borrowers' mortgage balances from a financial standpoint, and has recently introduced another line of defense that principal write-downs would shield U.S. banks from taking losses on distressed housing debt.
"To be clear, this disagreement is not about helping borrowers," he said. "We have found that payment reduction, not loan-to-loan value, is the key indicator of success in loan modifications."
Fannie Mae and Freddie Mac do offer forbearance plans, in which lenders don't require any payments on a portion of the loan for a specific time period. FHFA has said that is the preferred anti-foreclosure tactic.
DeMarco noted that about three out of every four deeply "underwater" borrowers with mortgages that Fannie Mae and Freddie Mac own or guarantee are current on their payments.
Since borrowers are showing a willingness to meet mortgage obligations despite being saddled with negative equity, he said, the rate of timely loan payments should not be "dampened with incentives for people to not continue paying."
"The fundamental point of a loan modification is to adjust the borrower's monthly payment to an affordable level," DeMarco said. "If the borrower remains successful in this modified loan, this approach preserves for taxpayers an ultimate recovery on the debt."
The two companies remain the largest sources of housing money in the U.S., financing about 60 percent of all new mortgages. Fannie Mae and Freddie Mac were taken into government control more than three years ago, as mounting defaults pushed them towards insolvency.
SOURCE Reuters
