A Difficult Road Ahead for Edward DeMarco's Replacement

by 07 May 2013

Public officials and housing analysts are closely watching President Obama's pick to lead the Federal Housing Finance Agency (FHFA), particularly with regard to the future stance on mortgage forbearance and principal reductions of home loans guaranteed by the U.S. government. 

Mel Watt, a Democrat from North Carolina and current member of the House Financial Services Committee, could replace Edward DeMarco in the near future if he is confirmed. Many are rejoicing the departure of DeMarco, the acting FHFA director who is notorious for his opposition to reducing principals balances of mortgages guaranteed by Fannie Mae and Freddie Mac as a means to avoid foreclosure.

Although Watt is a supporter of principal reductions as mortgage forbearance, he has also stated that it may be too late to widely implement the program now that the housing market is improving. 

A New Way of Looking at HAMP

DeMarco's opposition to implementing the Home Affordable Modification Program (HAMP) to mortgages guaranteed by Fannie, Freddie and the Federal Housing Administration (FHA) was based on administration costs and the possibility of abuse by some borrowers.

Various mortgage lenders and servicers required to implement HAMP under a major 2012 settlement are reporting that only 12 percent of the mortgages they modify end up in default a second time. This makes HAMP the most effective foreclosure prevention program. 

Ever since DeMarco said no to HAMP, the U.S. housing market has improved. This recovery has shortened the number of Fannie, Freddie and FHA borrowers who could benefit from a principal reduction down to about one million. Preventing those mortgages from going into foreclosure will not cause a substantial melioration of the housing market, but the White House is interested in reaching out to as many homeowners as possible.

Some housing analysts believe that the FHFA nominee may opt for a shared appreciation approach to HAMP. Under the shared appreciation scheme, borrowers who are desperately underwater at about 150 percent loan-to-value (LTV) may be offered a principal reduction only if they are willing to give up a portion of the property appreciation. By doing so, the mortgage lender or servicer will be able to lock the borrowers into their new, reduced mortgages a bit longer.

Shared appreciation may discourage those borrowers who are underwater at 115 LTV and less. These borrowers, however, can take advantage of other programs that can help them stay current on their mortgages until the housing market puts them back into positive territory.


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