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DeMarco Reiterates Stance Against Principal Forgiveness after Analysis

""FHFA"":http://www.fhfa.gov/ Acting Director Edward DeMarco released a statement Tuesday reiterating his stance that offering principal reduction for Fannie Mae and Freddie Mac loans is not in the best interest of the GSEs and taxpayers.


DeMarco has faced a barrage of criticism for not allowing the GSEs to apply the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA) program to underwater loans and has been urged by lawmakers to reconsider his position.

After what DeMarco said was extensive analysis, he stated, ""FHFA has concluded that the anticipated benefits do not outweigh the costs and risks. Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.""

In a ""letter"":http://www.fhfa.gov/webfiles/24110/PF_LettertoCong73112.pdf addressing Sens. Tim Johnson (D-South Dakota) and Richard C. Shelby (R-Alabama), DeMarco explained his position and the results of FHFA analysis.

Using a model-based analysis, a test was conducted to see if reducing a portion of a borrower's principal would decrease the likelihood of default to the extent that the GSEs and taxpayers would be better off.

According to the letter, in the most favorable analysis, implementing HAMP PRA may result in about 74,000 to 248,000 borrowers becoming eligible for principal reduction modifications at a positive financial benefit to the GSEs.

""However,"" DeMarco added, ""nearly all of this benefit is simply a transfer from taxpayers to the Enterprises, which would add to the over $188 billion in taxpayer support the Enterprises have already received. Under other reasonable assumptions, implementing HAMP PRA would actually increase taxpayer costs.""

In the best case scenario, DeMarco said the projected net benefit to taxpayers is $500 million, but the vast majority of the benefit comes from borrowers who have not made a mortgage payment in more than a year.


Adding yet another damper to the best case scenario, the acting director said the likelihood of successfully modifying and reinstating such delinquent loans is small, considering the fact that early intervention is a key factor to the success of a modification, which means the anticipated $500 million benefit is unlikely.

Another reason DeMarco provided for not supporting a HAMP PRA program for the GSEs was the operating costs for the program, the burden of which he said would fall on taxpayers, whether it was paid by Treasury or the GSEs. The letter stated the implementation cost would be roughly between $70 to $90 million for just the GSEs, plus costs imposed on servicers.

DeMarco also raised concerns over the moral hazard issue and the fear that underwater borrowers who are current on their mortgage might decide to fall behind in order to qualify for a HAMP PRA. If this were to happen, it could negate program benefits.

""If only a very small portion of the Enterprises' currently underwater but performing borrowers (3,000 to 19,000) strategically defaulted to seek principal forgiveness, HAMP PRA would result in a net loss to taxpayers, even using the model-based assumptions most favorable to the program,"" said DeMarco.

According to FHFA, approximately 80 percent of Fannie Mae and Freddie Mac underwater borrowers have managed to remain current on their loans.

DeMarco pointed out that while some mortgage market participants can be more selective when deciding who qualified for a principal reduction, the GSEs would have to be more systematic and uniform in their approach when establishing eligibility requirements that will go out to the GSEs' mortgage servicers.

In his letter, DeMarco highlighted other efforts FHFA is focusing on to help underwater borrowers and prevent foreclosures such as streamlining refinance opportunities and enhancing the short sale process.

FHFA also released a ""white paper"":http://www.fhfa.gov/webfiles/24108/PF_FHFApaper73112.pdf Tuesday detailing the analysis.

Treasury Secretary Timothy Geithner sent a letter to DeMarco, expressing disagreement with the acting director.

""I do not believe it is the best decision for the country, because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation's housing market, and result in a net benefit to taxpayers,"" said Geithner.

The secretary's ""eight-page letter"":http://www.treasury.gov/connect/blog/Documents/letter.to.demarco.pdf included arguments restating the case for principal reduction.

About Author: Esther Cho


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