The head regulator for Fannie Mae and Freddie Mac said Tuesday that a preliminary analysis shows that it might make financial sense for the government-backed mortgage giants to reduce the loan balances of struggling homeowners. But he said more study is warranted before making such a move.
Edward J. DeMarco, the acting director of the independent Federal Housing Finance Agency (FHFA), unveiled new data during remarks at the Brookings Institution that showed Fannie and Freddie could save an estimated $1.7 billion by taking advantage of enhanced incentives from the Treasury Department to write down the principal for some homeowners.
He made clear, however, that the new calculations are not enough to persuade him to allow Fannie and Freddie to offer principal reductions. DeMarco has been repeatedly reluctant to make such a move, in part because he worries that some borrowers might stop paying their mortgages in order to receive loan forgiveness, ultimately costing taxpayers more money.
“A key risk in principal forgiveness targeted at delinquent borrowers is the incentive created for some portion of the current borrower population to cease paying in search of a principal forgiveness modification,” DeMarco said.
That concern was echoed Tuesday by Frank Keating, president of the American Bankers Association, which has opposed large-scale principal reductions.
“Principal reductions create an incentive for a huge group of borrowers who have continued making their payments, despite lower home prices, to stop paying in hopes of principal forgiveness,” Keating said, adding that fewer investors would be willing to lend for housing finance under such a program.
The FHFA has been examining the potential impact of more-generous principal reduction incentives offered in recent months by the Obama administration. The White House, along with some lawmakers and housing advocates, has been trying to persuade DeMarco to allow Fannie and Freddie to write down loans to help homeowners who owe far more than their homes are worth.
In a statement on the report, Sen. Jeff Merkley (D-Ore.), one of many lawmakers who have pressed DeMarco to let Fannie and Freddie write down loans, said Tuesday: “Today’s analysis is a step in the right direction. When it makes sense, principal reduction can both save money for Fannie Mae and Freddie Mac and help struggling homeowners who are underwater.”
The preliminary analysis involved nearly 700,000 borrowers and assumed that each would receive an average of $51,000 in loan forgiveness. The FHFA found that Fannie and Freddie would save an estimated $9.9 billion by using principal reductions, compared with $8.2 billion if those same borrowers received loan modifications under the administration’s current program. The Treasury incentive payments needed to subsidize those modifications would cost taxpayers $3.8 billion, the analysis showed.
DeMarco said Tuesday that Fannie and Freddie, which have been under conservatorship since 2008 and have cost taxpayers $187 billion, do not have the ability that private financial firms have to pick and choose which loans are best suited for principal reduction. Rather, if the government-backed enterprises were to pursue loan write-downs, he said, “it would have to be clear and transparent, having a basis in the conservatorship mandate.”
In addition, he said, the companies would have to consider the costs of implementing the changes, such as new technology.
“We are still evaluating the direct operational costs,” he said, “but they are not trivial.”
DeMarco also noted that Fannie and Freddie have overseen a significant number of loan modifications and refinancings for struggling homeowners. Whether or not he allows the two firms to undertake principal reductions, DeMarco said, the universe of borrowers available for such aid “is well less than 1 million households, a fraction of the estimated 11 million underwater borrowers in the country today.”
“This is not about some huge difference-making program that will rescue the housing market,” DeMarco said. “It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers.”
DeMarco said he expects the FHFA to wrap up its analysis in the next few weeks.