Federal Housing Finance Agency Considers Mortgage Debt Reduction For Bankrupt: Report

The regulator for Fannie Mae and Freddie Mac is actively considering a proposal that would allow for a reduction in the outstanding mortgage debt of homeowners in Chapter 13 bankruptcy, Financial Times reported on Tuesday.

The plan under review by the Federal Housing Finance Agency would call for the mortgage financing companies to allow bankrupt homeowners who owe more on their housing debt than their homes are worth to pay zero per cent interest for five years, the report said.

Participation in the debt reduction program would be subject to approval by bankruptcy judges, the FT said.

Details of the proposal were laid out in a letter to Congress dated Monday, the newspaper reported.

Fannie Mae and Freddie Mac, combined with the Federal Housing Administration support, about 90 percent of all U.S. mortgages.

An FHFA spokeswoman confirmed the proposal to assist underwater homeowners was under discussion, but declined to provide additional details, the FT said.

But the White House said the proposal was not under consideration.

"While we continue to talk to the FHFA and other market participants about ways to help borrowers and support the housing market, the administration is not at this time considering this particular idea," White House spokeswoman Amy Brundage told FT.

Spokesmen for the White House and FHFA were not immediately available for comment on the FT report late on Tuesday.

(Reporting By JoAnne Allen; Editing by Muralikumar Anantharaman)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[GloriaY]

08:56 PM on 12/21/2011

Wonder what will become of homeowners whose homes are underwater, but have not filed for bankruptcy. Will they also receive a reduction in their principal, and will the savings be tacked on to the back end of the loan? If that is the case, will the banks not be the beneficiaries of this arrangement? Just wondering.

[ThinkingPatriot]

08:49 PM on 12/21/2011

This isn't anything access to the Fed "discount window" couldn't solve...oh, that's only for the 0.01%

[TrutherUSA]

07:21 PM on 12/21/2011

I must be missing the point here. It will allow brankrupt, underwater homeowners to not pay interest for 5 years. That doesn't lower your principle to get you on balance with the homes current price so in 5 years your still underwater. I would also guess that the lender will somehow benefit from this by adding the interst on at the end or some other creative option. Why not just reduce the principle to match current value, that would be a long term benefit. If you sell for a profit later then the profit goes back to the lender, up to the level of the previous amount owed.

[BonnieDoon]

04:20 PM on 12/21/2011

More pointed insight on this topic:

“FHFA’s DeMarco Considering Backdoor Bankruptcy Principal Modification Program for Freddie and Freddie”

“The other interesting part of this proposal is that the FHFA wrote to Congress. This is the second end run of the Administration for being unduly friendly to banks that has come to light this week ( the earlier one was the HUD inspector general ignoring the usual channel for prosecutions, the Department of Justice, and teaming up with New York attorney general Eric Schneiderman instead ).




Short article by Yves Smith, today 12/21/2011, at Naked Capitalism:

http://www.nakedcapitalism.com/2011/12/fhfas-demarco-considering-backdoor-bankruptcy-principal-modification-program-for-freddie-and-freddie.html

[fineartgalaxy]

03:14 PM on 12/21/2011

I am amazed at how many people have bought into the lie that less than 10% of all loans were fraudulent and then later, these less than 10% are so powerful as to bring the global economy down. Wake up Americans. A few homeowners "living a lie" do not cause the extintion of the entire middle class. They were not that powerful.

[Kenneth Alton]

03:01 PM on 12/21/2011

I will be honest: As somebody whose actually scrimped and saved and paid off their mortgage within the past few years, I feel kinda cheated. I admit that, given the state of things, this is probably a good idea to help the US economy de-leverage, to help the nation unwind from the insane asset inflation that was the housing bubble (as long as the banks and mortgage brokers, not the taxpayers, pick up the loss). But reading this sorta thing kinda makes ya feel like a bit of a chump for having done what was right.

[missprissanna]

09:11 PM on 12/21/2011

It would make me feel very thankful I was able to pay off my mortgage, unlike so many who are earning much less than ever before with little hope of catching up what they've lost the last few years.

[lrobb]

03:00 PM on 12/21/2011

The problem with any cram down legislation or regulation is that it would potentially raise interest rates for qualified borrowers to compensate for the risk. Also, if the mortgage balance is more than the home is worth, there is no point in simply allowing the borrower to pay principal only.

The ideal solution is foreclosure combined with a rent-back at market rate or buy-back provision which allows a foreclosed homeowner who could qualify for a loan to purchase their foreclosed property on the open market--absent the credit ding of the foreclosure--to re-purchase their property at its current value.

[fineartgalaxy]

02:51 PM on 12/21/2011

The fact is that the banks, Wall Street and the government started this state of financial anarchy and corruption. There is more than enough blame to go around. But make no mistake, this was the end result of extreme greed, anarchy and ill conceived deals at the highest financial, corporate and federal levels. This economy will not get healthy unless those that destroyed it start making amends. But they will not because the government allows them not to.

[fineartgalaxy]

02:22 PM on 12/21/2011

You are already allowed, if approved by the judge and the bank, to cram down your mortgage balance to market value. The catch is that you have to pay off the mortgage in 3 to 5 years while your Chapter 13 is still open. So if you owe 200K and the market is 100K, you will pay 100K in 3 to 5 years. So, in my humble opinion, if I can pay off a house in 3 to 5 years I do not really need to do a Chapter 13 bankruptcy or wait for a judge to tell me this. I would had settled with the bank a long time ago.

[Lindytindy]

01:47 PM on 12/21/2011

Don't you just love the way they continue to 'mull things over' while Rome burns? Meanwhile millions of people are losing their homes, 100% in some areas in California. But what's the rush...see they don't mean to do anything because the banks are making lots of money and they own our government. Read "Confidence Men" and see how true this is, Geithner is running the country, Obama is just a pass through. And unless we elect someone like Ron Paul, the next president will be the same.

[Jim Letchworth]

12:27 PM on 12/21/2011

..over the years, i've watched people who made considerably less than me buy houses in much better neighborhoods with a much higher price tag. now, some of those neighborhoods are in decline because of foreclosures, bankruptcy etc. if those folks get bailed out, won't their values eventually increase to the point where they'll be sittin' on a much more expensive piece of property than mine again? that would be very rewarding for them, but where's my reward for "playing by the rules"? will we ever again be able to tell our children, "work hard and save your money", "don't live beyond your means"? with the opposite attitude, where are we heading as a society?

[GetRealSoon]

01:43 PM on 12/21/2011

Living beyond your means is an expression to cover its true meaning - fraud. And the Great Depression took 27 years to recover, I wouldn't be too concerned over any short term profits. The values of work hard and save your money always remain instilled but are useless when financial and government forever continue to play a blame game.

[fineartgalaxy]

02:36 PM on 12/21/2011

It is not a blame game. It is total corruption of all financial systems. This is more than blame. This is corporate robbery being protected and aided by a corrupted government.

[saldog]

02:32 PM on 12/21/2011

Exactly right, Jim. A dangerous slope. Many of the "homeowners" put no money down or limited money down and never really owned the property in the first place. Many took equity out of their houses when prices were rising. I am not in favor of any principal writedowns but if they confined writedowns to people who put 20% down and did not take cash out, that would be the limit (people that suffrered real financial harm). They would find that there are not many of them out there. The best that should be offered is market rate with a 40 year term to lower the payment. Otherwise, it is fraud on the taxpayer. Notice that in states where they did not have runaway housing prices based on irresponsible living standards, the crisis is largely contained.

[fineartgalaxy]

03:07 PM on 12/21/2011

A lot of people bought with 20 and 30% downs a year or two ago, thinking the market hit bottom and they are, already, underwater. Keep in mind homeowners cannot get "fraudulent" and "bad" loans by themselves. They were sought by, looked for, aided by, provided with and encouraged by an entire system of bankers, appraisers, regulators, underwriters, closing agents, realtors and many others.

[fineartgalaxy]

03:12 PM on 12/21/2011

And you may want to add fraudulent loan underwriting by the banks. Fraudulent appraisals by the banks' appraisers. Two sets of loan documents, one for the bank and one for the closing agent. Information being withheld from the buyers. And on and on.

[IndyFem]

12:27 PM on 12/21/2011

It is unfortunate that this "proposal " requires a person to file Bankruptcy in order to get any temporary relief. What about those that do NOT want to go BK?

[fineartgalaxy]

02:38 PM on 12/21/2011

And how many people filing for bankruptcy, or not, can afford to pay off a house in 3 to 5 years?

[Old Grenadier]

11:58 AM on 12/21/2011

I, like many others here in America, have found out there is something worse than not acheving he American Dream. After dedicating 31 years of my adult life to a company whose employment clause required me to be of "good character", the company went bankrupt and broke their word with me through the courts, leaving me to lose my home in the midst of a medical tragedy. I am left with fifteen cents on the dollar, no health care and personal bankruptsy. Losing the American Dream after you thought you had it hurts more. I will get up from this battlefield, just like I did in Viet Nam and succeed again if I can get a job at 65.Ware the new hand apon the sway; you could be next.

[fineartgalaxy]

02:42 PM on 12/21/2011

Please know that many of us do know that this is not your fault. I was unemployed for over 9 months after 30 years of dutiful employment. I am not one to blame anybody. I have common sense to understand that democracy has been corrupted by a pathological relationship between the banks and the federal government. We are with you. Know you are not alone.

[Old Grenadier]

03:29 PM on 12/21/2011

Thank you for the kind words. It is easy to see why your compassion gathered a following of 400. And One. I agree the government we have isn't the same as the one our fathers left to us but I still believe the Constitution of the United States, if followed, even allowing for the document's elasticity, will prevail.

[Mister Grumpy]

11:32 AM on 12/21/2011

This will never fly with conservatives. They think only liberals declare bankruptcy.

[Chuck Dick]

11:28 AM on 12/21/2011

Does this help banks or Wall Street make MORE money? No? Then it won't happen.