As the prospect of principal mortgage write-downs become more a reality, the Federal Housing Finance Agency will make a key ruling on the decision sometime this month.
Agency head Edward DeMarco recently said in a speech to the Boston Security Analysts Society that after months of deliberation and combing through copious amount of real estate data and mortgage records, the FHFA is prepared to make a ruling on the matter.
Up to this point, the FHFA, which oversees mortgage activity for both Fannie Mae and Freddie Mac, was against the implementation of principal write-downs. However, after the Department of the Treasury announced in January that it plans to triple the incentive payments it would make to mortgage investors who allow write-downs, the FHFA began to reevaluate its stance on the issue.
But DeMarco noted in his speech that there will still be much deliberation about the implementation of any such initiative, as the agency believes a principal forbearance program could be just as successful in helping underwater homeowners.
"Indeed, we have found that payment reduction, not loan-to-value, is the key indicator of success in loan modification," DeMarco said. "If the borrower remains successful in this modified loan, this approach preserves for taxpayers an ultimate recovery on the debt."
Government data indicates that currently 75 percent of borrowers with mortgages backed by Fannie Mae or Freddie Mac that are severely underwater are current on their home loan payments. Should a principal reduction program go into effect, some industry experts fear it could result in a wake of strategic defaults.
However, a number of analysts from Keefe, Bruyette & Woods claim these concerns are overstated, since lending regulation would be put in place to prevent such occurrences.
"We believe that any principal write-downs will likely be just for mortgages that are modified through the HAMP principal reduction alternative," the analysts wrote. "Under the program investors are partially compensated for writing down principal on delinquent underwater loans. The administration recently raised the compensation levels to 18 to 63 cents on the dollar from six to 21 cents earlier."
Meanwhile, the Center for American Progress proposed a pilot program that would ease the financial burden for Fannie and Freddie should they partake in principal write-downs. Under the program, the GSEs would receive a percentage of a distressed home's value once it started to appreciate after receiving a principal write-down.