Fannie Mae And Freddie Mac: Homeowner Loan Forgiveness Would Save Us Money

Ed DeMarco, who oversees Fannie Mae and Freddie Mac, opposes principal reductions, which the mortgage giants say could save them money.

By Jessie Eisinger, ProPublica and Chris Arnold, NPR

New analyses by mortgage giants Freddie Mac and Fannie Mae have added an explosive new dimension to one of the most politically charged debates about the housing crisis: Whether to reduce the amount of money beleaguered homeowners owe on their mortgages.

Their conclusion: Such loan forgiveness wouldn't just help keep hundreds of thousands of families in their homes, it would also save Freddie and Fannie money. That, in turn, would help taxpayers, who bailed out the companies at a cost of more than $150 billion and are still on the hook for future losses.

The analyses, which have not been made public, were recently presented to the agency that controls the companies, the Federal Housing Finance Agency, according to two people familiar with the matter. Freddie Mac's meeting with the FHFA took place last week.

The decision of whether to allow such reductions rests with Edward DeMarco, the acting director of the FHFA, who has steadfastly opposed so-called principal reductions on the grounds that it's a bad business decision for the companies and would cost taxpayers money.

Many economists and policy makers contend that cutting principal -- the amount of money lent to the homeowner -- is one of the best solutions for keeping people in their homes and to bolster the fragile economic recovery.

But this solution has raised passionate opposition: Many borrowers who are paying their mortgages every month feel it is unfair. Why, they ask, should they have to keep paying the full amount while others who took a loan they ultimately couldn't afford or saw their house plummet in value get a break? Some economists and policy makers argue that borrowers might intentionally stop paying their mortgages to score a reduction. Indeed, the prospect that the government would help troubled homeowners was a spark that created the Tea Party movement.

The companies' new analyses were prompted by new Obama administration subsidies the government is offering Fannie and Freddie to reduce a homeowner's loan. But it's unclear whether DeMarco will take advantage of those incentives.

He declined to be interviewed for this story. But in a statement to ProPublica and NPR, DeMarco said that FHFA is assessing its position in light of the new Obama financial incentives, offered under the Home Affordable Modification Program, or HAMP. "As I have stated previously, FHFA is considering HAMP incentives for principal reduction and we have been having discussions with [Freddie and Fannie] and Treasury regarding our analysis."

Both Fannie and Freddie declined to comment.

As an independent regulator, DeMarco does not answer to the president and can make policies that the administration opposes. Obama sought to replace DeMarco, but his nominee was blocked by Republicans in the Senate, which must confirm the agency head.

As recently as Feb. 28th, DeMarco told the Senate banking committee, "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."

Overall, principal reductions could help millions of borrowers who owe much more on their homes than their houses are worth, economists estimate.

And principal reductions can help lenders, because foreclosure often leads to bigger losses than reducing the amount owed. The biggest banks have long employed such reductions to curb their own losses.

The new analyses by Freddie and Fannie were done to assess the new financial incentives that the Obama administration announced in late January. ProPublica and NPR have not read the analyses, but two people described key aspects of them. The companies now find that reducing principal on troubled mortgages has a "positive net present value" -- in other words, that doing it would bring in more money for the companies over the life of the loans than not doing it.

The two companies' analyses showed that upwards of a quarter million borrowers who owe more on their mortgages than their homes are worth could benefit from principal reductions. The companies would take a loss upfront, but over the long run these mortgage modifications would save the companies money because they would lead to lower default rates.

Experts have said that principal reductions are one of the best tools for helping homeowners stay in their homes.

"Principal reduction works," said Mark Zandi, chief economist of Moody's Analytics. "If someone gets a reduction in their principal amount, it gives them a real powerful hook to really fight to try to hold onto the home, even if things aren't going financially right for them."

The re-default rate for homeowners who receive a principal reduction is lower compared with the rate on other types of types of mortgage modifications, Zandi said.  

Zandi estimates that principal modification could benefit 300,000 to 500,000 homeowners whose mortgages were backed by Fannie and Freddie. "And that would make a substantive difference," he says, in helping the housing market and boosting the economy.

"It saves taxpayers money and makes homeowners less likely to default," said Zandi. Given the Obama Administration's policy changes, "I'm now perplexed why DeMarco is not more fully engaged" in supporting principal reductions.

Not everyone supports principal modifications. Anthony Sanders at George Mason University says that implementing such reductions risks triggering a wave of strategic defaults, where people stop paying on their homes in order to qualify for a break. "DeMarco is absolutely right," he says.

The Obama administration's new initiative triples the subsidies. They now range from 18 cents to 63 cents on the dollar, based on conditions such as how deeply underwater a borrower is. The subsidy works out so that generally the Treasury would pick up about half of Freddie and Fannie's principal reductions, according to a person familiar with the incentives.

The subsidies are funded through HAMP, which used money from the Troubled Asset Relief Program (TARP), widely known as the bank bailout.  Much of that money has not been spent.

Under DeMarco, the FHFA has allowed Fannie and Freddie to do principal forbearance, rather than principal reductions. In such a modification, borrowers' monthly payments are reduced, but they still must eventually pay back the entire loan. Critics contend that such modifications don't provide as much incentive as principal reductions for borrowers to keep paying.

Despite the new findings, it still might not make sense for Fannie and Freddie to do principal reductions. Such a program might require substantial and expensive changes to their computer and accounting systems and might distract from the core business. In his statement, DeMarco said, "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."

Yet even before the Obama administration's new subsidies, the FHFA's own data supported principal reductions for some borrowers, despite its opposition to using them, some argued. An American Banker analysis of the FHFA study, which the agency sent to Congress in January, suggested that principal reduction shouldn't be rejected so unequivocally.

Comments

[lenchu]

04:00 PM on 07/31/2012

The Republicans in the senate blocked the firing of this idiot, fire them all

[spqr05]

10:29 AM on 03/26/2012

If you think principal reduction is a good idea then you are stating that home values are currently overvalued and need to be lowered in price. This would cause those renting or with descent incomes to step up into a home they can afford thereby correcting and righting the housing market.

If you're against "banks and demonizing them" then you would be for our politicians to reinstate market to market which would force banks to write loans down on their balance sheets reflecting the true value of homes. This would mean the politicians and leaders that have all encouraged these practices and activities are wrong!!

So what are they hiding America? If you have such strong beliefs why don't you force these laws and practices that for hundreds of years have kept this country on the right track. Why over the past 10 to 20 years have these rules changed and all of a sudden we are back to worse than the great depression.

I know some liberals heads may explode from the truth but it's time to wake up, stop drinking the spiked koolaid and look at the facts. As you always look the other way

[spqr05]

10:11 AM on 03/26/2012

Con't

We are not Europe, we believe in capitalism the right of free choices to make good or bad investments. With that being said, in this country these people (underwater homeowners not all to blame for their situation) have been influenced to invest and make decision as politicians (mostly democratic including Barney Frank who's old bf was appointed head of freddie) pushed specific agendas and now they backfired. Causing people to be underwater, lose their homes and now they want to tell us how to clean up their mess. NO, I'm sorry you're fools. Plus your agendas don't fit with American values and culture.

Hold these politicians accountable and know the sources of the supposed news as George Soros has massive news influence and promotes his propaganda and beliefs in our country. He shouldn't be allowed to as he's not even American and we don't want to be Europe.

[spqr05]

10:11 AM on 03/26/2012

So NPR (govrnment funded) and ProPolitico (George Soros funded) are both providing dis-information about how the American taxpayers should be bailing out banks and people that made bad investment decisions. What we need to require is that all funding for these sources be included or hyperlinked to so that the readers know where their information is coming from.

Let's be real if George Soros wants to bailout people that are underwater in their mortgage he's more than welcome to spend his billions! However, we cannot allow government funded news organizations that push a hidden democratic or liberal agenda on the American people in the name of news or facts. If you read the other article in the business section on the huffingtonpost you find that fannie and freddie are actually doing much better than banks on helping underwater homeowners.

[SueZbell]

01:15 AM on 03/26/2012

NO.

Ultimately, that would just be another taxpayer funded bailout.

Let the market reset itself.

If you can't pay for it, you lose it.

If you loaned more than you get back, you lose.

If taxpayers are stuck for some of that, taxpayers pay.

BUT stop putting taxpayers on the hook for more and more and more of this next bailout.

Shut down Fannie and Freddie taxpayer guarantee/involvment in any future loans.

When foreclosed properties sell, they'll likely sell for less.

That's capitalism.

Government bailouts are a corrupt captialism and need to be STOPPED.

[wwilcox]

06:35 PM on 03/25/2012

With as much money and public exposure he has, you would think he would do something about his face.

[Martin Musetsky]

04:25 PM on 03/25/2012

Ed DeMarco should be fired. He is singlehandedly keeping the housing crisis from recovering.

Not since Breckinridge Long: http://www.pbs.org/wgbh/amex/holocaust/peopleevents/pandeAMEX90.html has a little-known bureaucrat destroyed the lives of so many for so long without good cause. Sheesh.

[spqr05]

10:14 AM on 03/26/2012

Martin:

You should look at the politicians that have benefited from this and the ones that changed laws to perpetrate this crime on our citizens. He's the only one looking out for taxpayers not politicians and their outside influence.. The only reason you don't like him is he doesn't answer to the president but the American people. You should stand up and congratulate him.

Plus he's done more to protect us than our President and politicians.

[tnjr]

04:23 PM on 03/24/2012

Principal reduction is not good, it rewards people who bought in over their heads and punishes fiscal responsible homeowners. Plus how will the bond holders get paid off on the Fannie and Freddie bonds? These bonds are the backbone of many "safe" bond funds and people's 401k's stable value funds. This will once again punish fiscal responsibile savers in favor of deadbeats. I didn't work and save so someone else could buy a house they cannot afford that is bigger then the house I live. How will China take it if they are told they will take a haircut on their positions and decide that they will no longer buy Fannie and Freddie paper in the future. Will will the money for future homeowners come from. We went thru this in the 90's with the S&L crises and home values rebounded to new highs. What happens when you cut some one's principal 10% and 5 years from now their house is worth 20% more then it is today. They should have to pay back the original principal when they sell their house, not be able to take the profits after the reduction. This is the new scam, get a reduction at someone else's expense (taxpayers, bondholders) and cah in for a bigger profit once the housing market rebounds. Sounds like more Obama share the wealth to me.

[Martin Musetsky]

04:18 PM on 03/25/2012

That's simplistic and dead wrong. The packaging of mortgages - good and bad together - is what created the housing crisis and what caused home prices to plummet. Many homeowners would refinance if they could but no longer have loan to value to do so. Until they adjust the mortgages to the decreased value they themselves caused, the banks, the economy, and the govt service entities will not be able to recover either. This is not a scam and would save taxpayers money in the long run.

[BonnieDoon]

05:51 PM on 03/25/2012

Thank you! You couldn't be more correct.

What baffles me is why the general public is so willing to give the perpetrator banksters the benefit of the doubt — those powerful banksters, who continue to enrich themselves, are the architects of the "bubble" that artificially drove housing prices so high and, then, burst. They strategized, designed, created, executed the “mortgage products” they sold to home buyers and then, “packaged” those products and sold them to huge US and global investors. TBTF banksters benefitted from and now shirk responsibility and accountability for the havoc they’ve wreaked on our country and economy.

Yet, the general public castigates and lays blame on the "deadbeats" on Main Street for the housing mess. In the beginning, there were “flippers” who took advantage of the “liar loans” offered by banksters. They washed out of the system pretty early in the downturn. There were borrowers who didn’t understand the mortgage and believed the lender; most of them have washed out of the system already. Now, the people being foreclosed on are primarily folks who have lost jobs, used up their savings/pensions/IRAs to pay the mortgage OR have had to declare bankruptcy as a result of medical costs from a life-altering accident or disease.

The Obama administration made a conscious decision — they chose the banks.


DeMarco should have been canned — Freddie Mac and Fannie Mae should have done this a long time ago.

[spqr05]

10:18 AM on 03/26/2012

Your completely wrong as you only know part of this. What helped cause the crisis was the packaging of these loans then the ability to use CDO's to provide investors with insurance on a bet that the loan would rise or fall. Had the loan risen they profited, plus they bought insurance on these bets and didn't have to put down collateral so they had all the upside and no downside. This is what caused AIG to collapse and as the true value of these homes was not on a straight line up as too many unqualified people couldn't afford the homes a small portion defaulted causing the house of cards to crumble.

If you think principal reduction is good than perhaps you can assume their liability as you want others to. Forget the banks, the american taxpayers.

How will this save taxpayers money only a small portion cannot afford their homes out of tens of millions if not hundreds.

Wake up Martin, you don't know what you're talking about and your cheerleader for the wrong side. Come over and join the winning side American Capitalism that was the greatest wealth creator than any other country or belief yet that we've seen.

[bvdon]

11:32 PM on 03/25/2012

I can afford my home. It's just too bad that many of my neighbors bailed out and in the process caused my home value to plummet by $100k in four years. I still make my mortgage payment on time despite being told by many that I am throwing my money away. The truth is it may be cheaper to reduce my principle balance down to the current appraised value. It would definitely help keep people in their homes as well as make it easy for people to sell if need be. And the benefit to the banks and gov is that the glut of foreclosures would drastically drop -- and that really helps everybody who owns a home in the long run. Fear not... I still pay quite a bit in taxes.

[T-Salt]

02:32 PM on 03/24/2012

Principal reduction makes the most sense. Keeping people in their homes helps the neighborhood retain its property values and helps the local governments who rely on property taxes as revenue. People who pay their mortgage every month on time should want their neighbors to stay in their home because (1) it keeps their own property values from dropping further and (2) it prevents substantial hikes in the local and school tax levies to make up for reduced revenues.

[freedda]

02:15 PM on 03/24/2012

As a homeowner who pays my mortgage every month, I don't like the idea of principal reduction. I think it would be more fair to allow for some type of deferral, where people still have to ultimately pay their full amount, but maybe the monthly cost of doing so is reduced.

I know that many people got into their current home mortgage mess through no fault of their own, but so many thousands of others should not have bought homes--why should they now be rewarded for taking on a a debt they knew they couldn't afford in the first place? And why, as a tax-payer, should I now foot the bill?

[Martin Musetsky]

04:21 PM on 03/25/2012

You won't be footing the bill. You would see your home value rise if they did this, which would return the money to the economy and to the govt via property taxes. The banks caused the crash by packaging good loans with bad loans, which was against bank practices since -- well, forever. The reduced loan to value is because of their criminal actions for which they haven't been prosecuted. Principal reduction would put the loan to value back in balance with the reduced value of your home caused by the bank. See how that works?

[freedda]

10:12 PM on 03/25/2012

Martin, I'm sorry, but I don't see how it works.

I bought my home, waiting a long time until I knew I could afford the payments, and thinking of it as a place I would live, not turn over or try to re-sell to make a profit on.

I know the banks have a lot to answer for here, but it seems to me that way too many people took on loans on bad terms which they couldn't afford, with the idea that they would sell them or refinance or somehow get out from under the loan before it was too late.

Well, that bet didn't pay off for them and many of them, and for many it's not a question of not being able to pay, but more that they don't want to pay on a home that's has lost value. So what? My home has lost value too, but I'm still living in it and paying my mortgage.

So, again, why should others get off the hook for their obligations--which they took on willingly? And why instead is it not a better idea work with "repackaging" the loans (which seems to be working in many cases) versus mortgage relief?

[pfodor]

01:11 AM on 03/27/2012

Thank you for at least acknowledging the millions of people who got in to the mortgage mess through no fault of their own. Additionally, you should realize that those same millions could afford, and still can afford, their mortgage payment. In other words, they did not get in over their heads to begin with, but rather bought their homes with reasonable insight and responsible intentions. However, being reasonable and responsible proved to be no match for the catastrophe and collapse that occurred when those who were less reasonable and less responsible with their home purchases bailed on their mortgage payments as soon as they realized they could no longer make them -- which was probably shortly after they purchased their homes. So, your fear that people who shouldn't have bought a home in the first place would be rewarded with a reduction in principal is unfounded as those people are no longer in the homes they purchased. Instead, it is the millions of reasonable and responsible people still left paying mortgages on now underwater properties that will never see the light of day as far as the amount owed on them versus the value of those properties. Reasonable and responsible people who have continued to pay their mortgages and pay their property taxes, thereby benefitting their neighbors and their communities. But, hey, don't reward them. Let's just make them continue to pay, and pay and pay. Sounds fair to me.

[GJOA]

01:21 PM on 03/24/2012

NYT against the principal reductions!
http://www.nytimes.com/2012/03/25/business/a-bailout-by-another-name.html

[LoyalDem4646]

12:44 PM on 03/24/2012

If anyone gets a principal reduction, everyone should get it. It's not that complicated but those owners who aren't underwater and never refinanced would have a fit. My proposal makes sense. You offer those underwater a choice. A reduced principal at a higher interest rate, or an underwater mortgage with low interest. I would take the reduced principal with higher interest because I would at least gain equity faster or I could resale my home without worrying about the hassles of short selling. I'm with BOA so whatever the government works out I already know BOA is too corrupt to do anything moral.

[builderman55]

11:27 AM on 03/24/2012

There is copious evidence that principal reductions would have a significant role in turning the housing crisis around and putting real steam into the recovery. But the banks, still blinded by their "moral hazard" ideology (can you even imagine, the criminal enterprises known as big banks warning about moral hazards?? THAT may be the BEST sign of just how sick we are as a nation...) refuse to see it. It is even more astounding that doing so would have a salutary effect on their own business. It's a little like a boater refusing to let go of the rope that is connected to the anchor that's pulling them under because they are sure that hanging on will save them..

[big tom]

09:50 AM on 03/24/2012

was this guy another bush paulson pick...?

[Martin Musetsky]

04:22 PM on 03/25/2012

If you mean DeMarco, I don't know who picked him, but he is singlehandedly stopping the housing recovery.

[GJOA]

04:40 AM on 03/24/2012

"The concentration of loans > 115% loan-to-value ratio is more than five times greater for PLS (private lenders) than for the GSEs", says the FHFA.
5 times greater, and nobody talks about the underwater borrowers of the big banks.
This data shows that FnF's loan underwriting standards are sound.
The politicians are just misleading you and FnF's losses have been just to build up a Reserve Fund.
Only in America.