Aug. 1, 2012 – As urged by NAFCU, the Federal Housing Finance Agency will not be adding any “principal reduction alternative” to the Home Affordable Mortgage Program run through Fannie Mae and Freddie Mac, FHFA Acting Director Ed DeMarco told lawmakers Tuesday.
DeMarco, writing to Senate Banking Chairman Tim Johnson, D-S.D., and Ranking Member Richard Shelby, R-Ala., said the benefits to homeowners of a HAMP PRA would not outweigh the costs or the risks of such a program.
The FHFA chief said other program improvements have been or are being made to enhance loss mitigation and borrower assistance, and he outlined these in his letter Tuesday. However, Treasury Secretary Tim Geithner expressed concern over DeMarco’s decision against principal reduction.
“We welcome the positive steps you announced today regarding further refinancing opportunities, providing clarity to lenders on legal exposures, aligning short sale practices, and putting foreclosed properties back on the market,” Geithner wrote. But he urged anew that DeMarco consider targeted principal reduction and said he would have his staff reiterate in writing the case for principal reduction.
The topic of principal reduction has been a bone of contention between DeMarco and certain members of Congress for more than a year. It was raised this February in hearings on the Federal Housing Administration, and NAFCU stepped in and warned that principal reduction for homeowners in arrears could encourage current borrowers who have underwater mortgages to strategically default in order to qualify for the program.
NAFCU continued to make that case as the debate focused more on the refinancing operations at Fannie and Freddie.
DeMarco, in his letter Tuesday, said between 74,000 to 248,000 borrowers might benefit from a principal forgiveness program. This could save taxpayers from $100 million to $500 million. However, he said that savings would be offset by other costs. He added that strategic default by only 3,000 to 19,000 borrowers who are current on their mortgages today would offset all taxpayer benefits in the best-case scenario.
Steps are being taken to strengthen loss mitigation and borrower assistance efforts, he said, including Freddie Mac’s issuance of new guidance for seller/servicers on streamlined refinancing; the development at both entities of new, consistent requirements for representations and warranties; and improvements to the short-sale process.
The FHFA this month will announce additional adjustments in guarantee fee pricing, he said, and Fannie expects to close on its first set of real estate owned pilot transactions this month.