Joe Raedle/Getty Images A Fannie Mae/Freddie Mac mortgage services representative (left) helps a person register for mortgage help in Miami.
The two most powerful entities in the housing
market — Fannie Mae and Freddie Mac — could be on the verge of a
significant change regarding foreclosures. NPR and
ProPublica
have learned that both firms have concluded that giving homeowners a
big break on their mortgages would make good financial sense in many
cases.
In these so-called principal
write-downs, a portion of the loan is forgiven for someone who's having
trouble paying. Many Democrats are pushing for this change. Most
Republicans are against it. So far, a key federal regulator is blocking
Fannie and Freddie from adopting the approach.
In
recent days, financial executives at Fannie and Freddie have made
presentations to their regulator saying that principal reduction for
many homeowners would prevent larger losses and keep people in their
homes.
Read a
statement to NPR from Federal Housing Finance Agency Acting Director
Edward DeMarco about proposals to reduce mortgage principal:
"As
I have stated previously, FHFA is considering HAMP incentives for
principal reduction and we have been having discussions with the
Enterprises [Fannie Mae and Freddie Mac] and Treasury regarding our
analysis. FHFA's previously released analysis concluded that principal
forgiveness did not provide benefits that were greater than principal
forbearance as a loss mitigation tool. FHFA's assessment of the investor
incentives now being offered will follow the previous evaluation,
including consideration of the eligible universe, operational costs to
implement such changes, and potential borrower incentive effects. As we
complete the review, the public should understand that Fannie Mae and
Freddie Mac continue to offer a broad array of assistance to troubled
borrowers and have continued to implement HARP 2.0 to enhance
refinancing opportunities for underwater borrowers. FHFA remains
committed to its legal responsibilities as conservator to ensure
assistance is offered to troubled borrowers while minimizing losses to
taxpayers."
Watch a video of the FHFA's DeMarco testifying before the Senate Banking Committee on Feb. 28.
Read a blog post by Mark Calabria, director of financial regulation studies at the libertarian Cato Institute,
in support of the FHFA's DeMarco.
Read an online column by David Abromowitz, senior fellow at the liberal Center for American Progress, saying
principal reduction is overdue.
This is a big development in a charged political
issue. Some economists and many Democratic lawmakers see principal
reduction as a powerful tool for helping the housing market.
A Game Changer?
"Principal
reduction works," says Mark Zandi, chief economist of Moody's
Analytics. "If someone gets a reduction in their principal amount, it
gives them a powerful hook to really fight to try to hang on to the home
and not go into foreclosure."
As Zandi
explains, if someone is struggling to pay a $200,000 mortgage and their
house is only worth $150,000, the owner might decide to walk away. But
if the lender forgives $50,000 of the amount owed, that's a game
changer.
Fannie and Freddie guarantee and
control most of the home loans in the country. Zandi says that if Fannie
and Freddie "fully committed to the idea of doing more principal
reduction [modifications] that we would see several hundred thousand —
300,000 to 500,000 in principal reduction mods over the course of the
next several years of Fannie and Freddie loans. And that would make a
substantive difference."
That's 300,000 to
500,000 homeowners getting a big break on their mortgage. Zandi says
that could do a lot to tip the housing market toward recovery — and
thereby help the whole economy.
Other
economists disagree. And Fannie and Freddie's regulator has so far
refused to allow this approach. Ed DeMarco, the head of the Federal
Housing Finance Agency, controls Fannie and Freddie following a giant
federal bailout of the two companies. At a recent
Senate hearing, DeMarco said he wants to prevent foreclosures.
"But we need to do so in a way that we are meeting our mandate to protect the taxpayers," he said.
In other words, he needs to be a good steward of
taxpayer money. Last month, DeMarco testified that Fannie and Freddie
themselves told him that they didn't support principal reductions.
"Both
companies have been reviewing principal forgiveness alternatives. Both
have advised me that they do not believe it is in the best interest of
the companies to do so," he said.
Flood Of Defaults Feared
But
now Fannie and Freddie appear to be saying the opposite. In part that's
because the Obama administration has recently tripled the incentives it
offers to lenders who do these principal write-downs. So now, in many
cases, if a lender writes off, say, $50,000 of principal, the government
will reimburse half that — $25,000.
That's a lot of taxpayer money. Many Republican lawmakers don't like that. And some economists hope DeMarco stands his ground.
"I
think DeMarco is absolutely right," says Anthony Sanders, a professor
at George Mason University. He says that if Fannie and Freddie start
forgiving big chunks of what many people owe on their mortgage, they
risk triggering a huge wave of strategic defaults. That is, people who
don't really need the help would default on purpose to try to get it.
Once you throw
in principal reductions as a carrot, the level of disinformation from
consumers will be legion. People will then pretend they have to go into
default just to get the principal reduction.
- Anthony Sanders, a professor at George Mason University
"Once you throw in principal reductions as a
carrot, the level of disinformation from consumers will be legion,"
Sanders says. "People will then pretend they have to go into default
just to get the principal reduction."
Critics
say that could result in a near cataclysmic mess. Hundreds of thousands
of people could stop paying their mortgages. And they would flood their
lenders with calls, stumbling over each other to try to get free money.
"That's
going to take a lot of manpower to try to sort through these — who
actually needs one and who just wants a principal write-down at taxpayer
expense," Sanders says. "This could blossom into something really
ugly."
Still, the private sector has already
been doing many more principal write-downs — by one count, 15 percent of
all recent loan modifications. And proponents say so far the sky isn't
falling.
For his part, DeMarco told NPR in a
statement that the FHFA is now considering these new incentives and
whether they change his agency's prior analysis of principal reduction.
He added, "Fannie Mae and Freddie Mac continue to offer a broad array of
assistance to troubled borrowers."
Meanwhile,
political pressure on DeMarco is building, at least from Democrats.
More than 100 lawmakers have signed a letter asking him to reconsider
and allow principal reduction.
NPR's Chris Arnold reported this story in partnership with Jesse Eisinger of ProPublica.
UPDATE,
April 10, 2012: The National Fair Housing Alliance filed a complaint
with the U.S. Department of Housing and Urban Development against Wells
Fargo, alleging discrimination in foreclosure maintenance. The company
denied the charge.
