Principal reduction program a no-go

As a number of policymakers, politicians and industry groups continue to weigh the pros and cons of a principal reduction program, the agency that oversees mortgage activity at Fannie Mae and Freddie Mac announced will not allow such an initiative.

As a number of policymakers, politicians and industry groups continue to weigh the pros and cons of a principal reduction program, the agency that oversees mortgage activity at Fannie Mae and Freddie Mac announced will not allow such an initiative.

The Federal Housing Finance Agency, after making a thorough assessment of the long- and short-term implications of principal reductions, determined it would be damaging to both the taxpayers and the books of business for the government-sponsored enterprises.   

"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," FHFA acting director Edward DeMarco said.

Earlier this week, analysts determined that the implementation of a principal reduction program could save Fannie and Freddie an estimated $3.6 billion, but when factoring in payouts to the Department of the Treasury, the savings would be closer to just $1 billion.

Mortgage records indicate there are currently more than 11 million underwater borrowers across the country who could benefit from an industry-wide principal reduction program, accounting for roughly 25 percent of total home loans. Of the mortgages backed by Fannie and Freddie, an estimated 500,000 may have been able to take advantage of a reduction if the program went into effect.

In a letter to Congress, DeMarco added that a principal reduction program would cost roughly $90 million per month to implement during the first year, and take mortgage services up to 12 months to get up to speed before any borrowers would benefit. This would have dropped the savings of Fannie and Freddie to less than $500 million.

Additionally, some real estate experts feared introducing a principal reduction program would result in a wave of strategic default across the country, which would add further financial pressure to the initiative. Specifically, they estimated just 19,000 strategic defaults would offset the benefits of the program.

Although the implementation of a program was axed, it still has the support of Treasury secretary Tim Geithner, who in a letter to the FHFA urged the agency to utilize principal reduction through initiatives, such as the Home Affordable Modification Program, and to reconsider its decision.



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