DeMarco: Principal Reductions May Save FHFA $1.7 Billion

by 11 Apr 2012

( -- The Acting Director of the Federal Housing Finance Agency (FHFA), Edward DeMarco, has recently taken a lot of flak from public officials and housing analysts regarding his unwillingness to allow principal reductions on troubled mortgages guaranteed by Fannie Mae and Freddie Mac.

DeMarco’s narrow view may be changing. During an appearance at the Brookings Institution in the District of Columbia, DeMarco stated that the two government-sponsored mortgage giants could actually realize savings by reducing the principal amounts in some home loans. DeMarco’s role at the FHFA is to look after the financial health of both Fannie and Freddie, two institutions that are key to the economic recovery of the United States but that are in financial peril.

The principal write-downs in question are part of the recently approved nationwide foreclosure settlement agreement. The five major mortgage lenders in America will soon begin to contact borrowers who are stuck with underwater mortgages, whereby they owe more on their home loans than what the properties are actually worth.

DeMarco was initially opposed to such reductions on loans guaranteed by Fannie Mae and Freddie Mac, which make up about half of the American mortgage market. DeMarco’s rationale was that reductions would end up costing taxpayers too much. Taxpayers have contributed $190 billion to the two troubled mortgage giants since they essentially crashed during the apex of the global financial crisis in 2008.

The reason behind DeMarco’s change in opinion comes from the U.S. Department of Housing and Urban Development (HUD). Just a few days ago, HUD announced an initiative to entice DeMarco to loosen his restrictions in terms of principal write-downs. The initiative involves financial incentives from the U.S. Treasury, and it would provide Fannie and Freddie with as much as 60 percent of the principal reductions they extend to their qualified borrowers.

DeMarco’s decision would be announced in the next few weeks. The preliminary analysis is positive as the FHFA could realize $1.7 billion in savings.

There is still one issue that needs to be carefully considered, according to DeMarco. Speaking at the Brookings Institution, he wondered if the principal write-downs would entice borrowers who are underwater but not delinquent on their loans to suddenly stop making monthly mortgage payments as a way to qualify for the program.

There are approximately 3 million Fannie and Freddie mortgages that are considered to be underwater at this time. Not all borrowers will qualify for principal write-downs, and it is expected that many could end up losing their homes to foreclosure.


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