The ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) says as of June 30, 2011, ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com held nearly 3 million first lien mortgages in which the borrower owed more on the loan that the home was worth.
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FHFA estimates principal forgiveness for all of these mortgages would require funding of almost $100 billion to pay down the loans to the value of the homes securing them.
In response to a request from members of Congress, FHFA on Monday publicly disclosed the analysis that led the agency to exclude principal forgiveness from the menu of loss mitigation tools available to the GSEs.
Reps. Elijah E. Cummings (D-Maryland) and John F. Tierney (D-Massachusetts) have been ""pressing for a subpoena"":http://dsnews.comarticles/congressmen-push-for-subpoena-of-fhfas-principal-reduction-analysis-2012-01-19 to be issued to obtain this data from FHFA in order to evaluate the agency's reasoning for prohibiting principal reductions on Fannie and Freddie's loans.
The lawmakers cited public statements by high-level officials at the Federal Reserve, championing principal forgiveness as a viable solution for heading off defaults and foreclosures, and they questioned FHFA's determination that reducing principal balances would not serve the best interests of the GSEs, taxpayers, and the housing market at large.
Edward DeMarco, acting director of FHFA, responded with a lengthy letter, supplemented with data charts, equations, and the findings of three separate staff analyses prepared over the past year.
He said FHFA did not conclude that ""principal reduction never serves the long-term interest of the taxpayer when compared to foreclosure,"" as the congressmen alleged.
In considering principal forgiveness, FHFA compared taxpayer losses from principal forgiveness versus principal
[COLUMN_BREAK]forbearance, an alternate approach the GSEs currently use in which no interest is charged on a portion of the underwater amount.
In the event of a successful modification, FHFA determined that forbearance offers greater cash flows to the investor than forgiveness. The net result of the analysis is that forbearance achieves marginally lower losses for the taxpayer than forgiveness, although both forgiveness and forbearance reduce the borrower’s payment to the same affordable level, FHFA explained.
“Given that any money spent on this [principal forgiveness] endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action,†DeMarco stated in his letter to Cummings and Tierney.
The FHFA director also pointed out that nearly 80 percent of the GSEs’ underwater borrowers were current on their mortgages as of June 30, 2011. Even among those deeply underwater, with loan-to-value ratios (LTVs) above 115 percent, DeMarco says 74 percent were current on their payments.
“Being underwater does not imply that a borrower lacks the ability or the desire to make good on their financial obligation, nor does it relieve a household from that responsibility,†DeMarco stated matter-of-factly in his letter to lawmakers.
For delinquent and deeply underwater borrowers, Fannie Mae and Freddie Mac offer loan modifications that include principal forbearance to relieve some of the debt burden. DeMarco says these modifications reduce monthly payments to the same affordable rate that would be in place with forgiveness.
For underwater borrowers who remain current on their mortgage, DeMarco notes that the agency made several changes to the Home Affordable Refinance Program (HARP) last October to open it up to more borrowers, allowing them to take advantage of today’s lower rates and shorten their mortgage term in order to get back above water more quickly.
“While it is not in the best interests of taxpayers for FHFA to require the [GSEs] to offer principal forgiveness to high LTV borrowers, a principal forgiveness strategy might reduce losses for other loan holders,†DeMarco conceded.