Federal Housing Finance Agency Considering Proposal To Forgive Mortgage Debt

The regulator for Fannie Mae and Freddie Mac was reviewing a proposal to help troubled homeowners by forgiving a portion of their outstanding mortgage debt, Democrats in the House of Representatives said on Wednesday.

The head of the Federal Housing Finance Agency (FHFA), which oversees the mortgage-financing companies, met with 19 Democrats and discussed a proposal that would allow bankruptcy judges to reduce principal amounts on loans.

Representative Elijah Cummings, the top Democrat on the House Oversight and Government Reform committee, set up the meeting to discuss ways to dampen the foreclosure crisis.

Mortgage principal reduction is currently a voluntary process, often not taken by the lender. As the Obama administration moves toward helping more borrowers refinance, talks of principal forgiveness have reemerged, seen by some as an effective tool in slowing the pace of foreclosures.

Representative Zoe Lofgren, a California Democrat, proposed securing meaningful principal write-downs for underwater homeowners by allowing a temporary reduction in the interest rates of those homeowners who file for bankruptcy.

She presented the plan in a letter to President Barack Obama earlier this month and it was discussed by the Democratic lawmakers and FHFA's acting director Edward DeMarco on Wednesday.

"I am encouraged that the Federal Housing Finance Agency is considering a plan similar to the one I've long advocated," Lofgren said. "Allowing homeowners to pay down the principal balances" and linking this effort "to the bankruptcy process will help those who truly need it and avoid the administrative failures that have plagued other modification initiatives," she said.

Lofgren's plan would allow borrowers to pay down loan principal and reduce negative equity during a five-year period with no interest. In exchange, homeowners would agree to settle claims against servicers, which shields them from litigation, according to Lofgren's letter to the president dated October 11.

DeMarco said his legal team had already begun reviewing the proposal, according to a statement from the Democrats on the House oversight panel. DeMarco committed to providing a more detailed assessment of the proposal within two weeks, said lawmakers who attended the meeting.

The FHFA was not immediately available for comment.

FHFA does not allow write-downs because reducing principal would lower the value of both Fannie and Freddie's assets. However, the Federal Housing Administration and some lenders have developed programs to encourage write-downs.

Both government-sponsored enterprises, Fannie Mae and Freddie Mac, combined with the Federal Housing Administration support about 90 percent of all mortgages.

Widespread principal reduction is a possible outcome state attorneys general are seeking, along with the Justice Department.

Wednesday's meeting with the regulator was a follow-up to an October 6 session in which lawmakers pressed DeMarco to help more underwater homeowners refinance their mortgages at current historically low interest rates.

On Monday, DeMarco and the White House announced that FHFA was retooling a two-year-old federal program that spurs refinancing.

(Reporting by Margaret Chadbourn; Editing by Gary Hill)

Corrects that FHFA does not allow write-downs, but Federal Housing Administration has some programs to encourage them, paragraph 11.

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[Warren H]

11:34 PM on 11/01/2011

This will be just awesome.....no one will be able to get a loan because the banks won't be able to afford to give them out if they can't repo the collateral.

[barbra1971]

08:42 PM on 10/30/2011

Too little too late!

"FHFA does not allow write-downs because reducing principal would lower the value of both Fannie and Freddie's assets. However, the Federal Housing Administration and some lenders have developed programs to encourage write-downs."

Could anyone explain to me how is it going to help Fannie Mae and her boyfriend if homeowners walk away and go for bankruptcy instead? What is the difference between bankruptcy or forgiving part of the loan voluntarily and the program they are trying to establish? Who is going to make money on it if they do?

[Donald Fannin]

07:16 AM on 10/30/2011

Reducing rates, and stretching out the payments do not solve the underlying problem. You owe more than the house is worth. It is freezing the Real Estate markets. People have a choice of staying put (forever?) or mailing the keys back to the bank. ITS THE PRINCIPAL STUPID!

[goodmarina]

11:10 AM on 10/29/2011

regardless of your politics, dogma or bias ... one thing is certain: the more "the market" carries toxic assets (even those that come in the form of underwater mortgages), the worse it is for the market. foreclosing on folks and selling the homes at further reduced value, OR having homeowners/mortgage holders walk away from their mortgages is NOT the solution. it will further flood the market and create a never-ending cycle of loss in property values. at this point - as a consumer community (or even as a society), the issue is not about who did what, who was responsible, or who deserves the help ... it is more about us protecting our existing assets and values as a society. and in order to do so, we must come up with a comprehensive solution that deals with this ongoing crisis of continued devaluation of homes in certain large markets. beside the loss in value - the more these toxic assets are carried, the more it translates into higher borrowing rates / costs as well. like it or not - those devaluations cost the "collective us". and make no mistake -- we all pay for it ... even though the politically slanted, expeditious question is: "who pays for this" (where folks often mean, does that tax payer pay for it). the reality is: the consumer pays for it one way or another. c

[2 Party Corruption]

08:29 AM on 10/28/2011

Secured ... and unsecured.

Mortgages are secured loans.

It can be argued that the portion of a mortgage that exceeds the current value of the property is no longer secured ... and should be treated as such in a Chapter 13 bankruptcy filing.

This is not a new concept ... they are simply reviving one of their 2008 campaign promises.

Allowing the bankruptcy courts to handle this crisis has always been the "only" actionable plan.

The Buyers bought a home ... and guessed wrong.
The Banks financed the home ... and guessed wrong.

Buyers file for bankruptcy (painful) ... and the Banks take a hair cut (it's business).

[Nick3169]

08:27 PM on 10/27/2011

Who is going to pay for this? The Country is almost bankrupt and can’t afford another giveaway. I wish President Obama could understand that he is leading us toward bankruptcy, but he is too busy campaigning and just wants to spend.

[2 Party Corruption]

08:22 AM on 10/28/2011

These losses already exist.

When a Fannie Mae loan defaults ... it is sold for a loss.

For Fannie Mae ... it's no different their asset is sold for a loss ... or if a bankruptcy Judge discharges a portion of a persons mortgage balance.

Given the choice ... discharging a portion of a person's mortgage would prevent another foreclosure ... and slow the decrease in surrounding property values.

Foreclose, throw them out, and take a loss ... or modify their principal balance, keep them in their home, and take a loss ?

[Mister E]

06:27 PM on 10/27/2011

I have a mortgage that is now "underwater"; not my fault but my problem nonetheless. If there is anyway to correct this I appreciate hearing it. Too many of us have become cynical to this crisis. I fortunately still have a job but am struggling with the fact that I am paying for a home that has nowhere near the value it had when I purchased it. I make payments on time each month so why not fix that mortgage to reflect the current value of the house. I am having a difficult time seeing what the problem is with this. I am NOT asking you to pay my mortgage I am asking for a fair deal on it based on the economy today. That would give me and A LOT of others more cash in the pocket which we would most definitely use to pay other obligations(food, health care, credit cards etc.) and maybe even spend some at a store thereby helping that business as well.

[IndyFem]

06:55 PM on 10/27/2011

Mister E....What makes total sense to us....unfortunately does not fit into the Banks' Master Plans. You would be satisfied if your loan amount stayed the same (no reduction of the principal amount) but your Interest Rate was adjusted to current rates. Very Reasonable. The Banks are holding us hostage.

[Mister E]

07:22 PM on 10/27/2011

Yes, I know just wish there was more we could do about it.

[ReaItors Are Liars]

08:01 PM on 10/27/2011

IndyFemTheRealtor panders more.

[ReaItors Are Liars]

08:00 PM on 10/27/2011

No. You're asking someone to subsidize your massive losses on a house.

[Dosadi]

08:03 PM on 10/27/2011

The losses are not his fault. His loss is due to his equity being stolen from him by the banks. How did they do it? They simply had the appraisers lower the value of any home within two miles of a foreclosed home. He got robbed and you are trying to claim he has to pay for it. The banks took the money from all of us.

[ReaItors Are Liars]

06:03 PM on 10/27/2011

Get housing prices down to the long term trend(roughly 1991 prices) and this "problem" goes away.

[webwzrd]

03:33 AM on 10/28/2011

how?

[ReaItors Are Liars]

07:31 AM on 10/28/2011

It is grossly inflated prices that caused "the crisis". It is dramatically lower prices that will solve it.

[Robert Fanney]

05:40 PM on 10/27/2011

This is a decent proposal and one that would help many American families. However, why don't we remove all risk of a future crisis and also reinstate Glass Steagall while we're at it?

If you want to help, please sign the petition here http://www.change.org/petitions/us-congress-reinstate-glass-steagall

[cats530]

04:55 PM on 10/27/2011

Good idea and repeal Gramm-Leech-Bliley and repeal the Commodities and Futures Modernization Act and toothless lobbyist-written Dodd-Frank.

[Robert Fanney]

02:41 AM on 10/28/2011

Yes. Just bring sound banking and investment practices back. It's really not that complicated. In fact, things have been made too complicated by these supposed whiz-kids on Wall Street. It's like teenagers who can't drive the speed limit. Inevitably they wreck the car.

[spud3]

05:39 PM on 10/27/2011

Why is it that the people who have always lived within their means now are being asked to help those that don't live within their means.

[cats530]

05:48 PM on 10/27/2011

You mean the banksters? You've been helping them to trillions and now they want 250 trillion more for their toxic derivatives schemes.

[spud3]

06:11 PM on 10/27/2011

No i don't mean the banksters. I mean the taxpayers.

[francfist]

05:51 PM on 10/27/2011

That statement seems a bit arrogant to me. Not everyone is in trouble because they didn't live within their means. How about if I start wishing you lose your job because companies are laying off, and then you can't find another job and can't pay for your home and then we get to act like you deserved it because you didn't live within your means. I bought a $135,000 house and put $15,000 down and paid fees and costs. Now I am unemployed, can't find a job, tied to a house in a state with higher than normal unemployment and you are sneering at me on the verge of losing my home, my investment, because I lived beyond my means you say. If you said that to me in person, I can guarantee you, I would answer your sneer in a different manner than writing these contemptuous words about you!

[ReaItors Are Liars]

05:59 PM on 10/27/2011

You paid too much. Hows that different than anyone else who bought a house 1998-2011?

[spud3]

06:15 PM on 10/27/2011

When i purchased a home 20% down was the minimum down payment considered...my rate was 9%....and i paid it off. I did not buy outside my means if the worst case happened i knew i could always make it because i did not overbuy.

[robertso2020]

04:39 PM on 10/27/2011

I wonder if protesters will Occupy Main Street if mortgage owners get bailed out?

[stevnjessie1]

05:30 PM on 10/27/2011

Being underwater is my Number One gripe. But if this solution helped me, I figure that at last we are heard. If we are heard, then I'll be on that street more than ever. There's a lot more fixin' to be done.

[Mister E]

05:18 PM on 10/27/2011

I will be standing right beside you!!

[murfiani39]

03:22 PM on 10/27/2011

speak english how does this help home owners and the country.. are all mortgages part of this deal ????????

[pbr56]

06:09 PM on 10/27/2011

In bankruptcy.

[jwalter]

03:29 PM on 10/27/2011

The economy will not recover until the federal government stops trying to re-inflate the housing bubble and lets housing prices come back to a level where people can actually afford to buy one.

[ReaItors Are Liars]

03:05 PM on 10/27/2011

This will never happen. EVER.

The Problem: Grossly Inflated Housing Prices

The Solution: Dramatically Lower Housing Prices

The Solution is coming to every city, town and state in America.

[Bill Roth]

02:58 PM on 10/27/2011

Really? Give the mortgages back to the banks that wrote them. Dollar for dollar. Dismantle the TBTF. Arrest the ring masters for fraud. Send a clear message.