FHFA Says No To Cutting Amount Homeowners Owe On Fannie Mae & Freddie Mac Mortgages

Saying Fannie Mae and Freddie Mac have already cost taxpayers more than $188 billion, the acting chief of the Federal Housing Finance Agency, which regulates those lenders, says he has concluded that those firms won’t participate in the Obama administration’s program to cut the amount struggling homeowners owe.

Edward DeMarco, the acting chief of the FHFA, said in a letter to the Senate Banking Committee that he’s given the matter a lot of thought, but that the principal reduction part of the Home Affordable Modification Program “would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers.”

U.S. Treasury Secretary Timothy Geithner has already responded to express his disapproval of DeMarco’s decision.

“I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs,” he wrote, according to MarketWatch. He argues that participating in the program could lead to help for 500,000 homeowners and save Fannie and Freddie $3.6 billion when compared to other loan-modification programs.

“In view of the clear benefits that the use of principal reduction by [Fannie and Freddie] would have for homeowners, the housing market and taxpayers, I urge you to reconsider this decision,” he wrote.

Fannie and Freddie own or back around 56% of all mortgages in the country, with 11 million of those homeowners currently owing more than their homes are worth.

DeMarco is worried, however, that borrowers who are doing fine with paying their loans right now will intentionally go delinquent or claim they need help in order to qualify for principal reduction. He added that if 3,000 to 19,000 borrowers who are current on their mortgages took that tack, it would offset any taxpayer benefits the FHFA might see from letting Fannie and Freddie participate.

He suggested other steps instead to help the housing market recover as a whole, like streamlining the refinancing process, and enhancing short sale procedures.

Fannie Mae regulator says no to principal cuts [MarketWatch]

 

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  1. TuxthePenguin says:

    “DeMarco is worried, however, that borrowers who are doing fine with paying their loans right now will intentionally go delinquent or claim they need help in order to qualify for principal reduction. He added that if 3,000 to 19,000 borrowers who are current on their mortgages took that tack, it would offset any taxpayer benefits the FHFA might see from letting Fannie and Freddie participate.”

    This, boys and girls, is what we call moral hazard.

    • ChuckECheese says:

      I would not find it a moral hazard to see every last mortgage’s principal reduced to pre-bubble levels.

      • NeverLetMeDown2 says:

        Really? Then you don’t understand moral hazard, unless, at the same time, you want to impose a 100% tax on all capital gains from residential real estate generated in 2001-2008.

        • ChuckECheese says:

          Too late for that – it has all been spent on venti mochaccinos and granite cabinetry. Let’s devalue what we haven’t yet shit out.

      • Coles_Law says:

        If a person has held the same mortgage since before the bubble, their remaining principal today will be less that it was all those years ago. If they refinanced, then they got money out of the deal, and ‘resetting’ would be giving them that money for free.

        • frank64 says:

          I think ChuckECheese is saying that those who bought the houses at the bubble prices should be protected from their decision. Doesn’t answer the moral hazard issue though.

          • bigroblee says:

            Yeah, so basically those that purchased at the peak should be protected from their mistakes, but those that were smart enough to sell at that time will still be able to benefit.

          • ChuckECheese says:

            Indeed I am all about the mass redistribution of wealth and the screwition of the banking class.

            • NeverLetMeDown2 says:

              That would be a mass distribution of wealth to people who made unsuccessful investment decisions (not saying they were bad or good, but that they didn’t turn out well – people make very smart, well-thought-out investments that lose money all the time) from people who made successful investment decisions, including you (since you don’t have an underwater mortgage).

        • JJFIII says:

          Foreclosure would do the exact same thing, BUT at the same time lower the value of your neighbors home and stop most maintenance on the property. Quite frankly, that is the risk the lender took. I advise ANYBODY that is under water significantly on their mortgage to WALK AWAY. It is the only sensible BUSINESS decision. Businesses and corporations see no problem filing BK or walking away from unprofitable situations if it helps their bottom line. The mortgage is very clear, if you do not pay, they take your house and that is it (in most states). Continuing to pay for something that is not of the same value as it was previously is just foolish.
          The only reason people continue to do it is due to a inherent belief that they SHOULD pay it back based on some morality. If morality were the issue, why did the bank loan money in the first place? PROFIT.

          • ChuckECheese says:

            Thank you for pointing out the hypocrisy of those who would criticize anybody who would try to get out from under one of these ridiculous bubble mortgages created by and for banks primarily for their benefit.

          • cris3429 says:

            The banks want you to walk away. They are insured against any foreclosure, that’s what the PMI it’s private mortgage insurance that protects the bank if you default, so you walk away from your house, destroy your credit, you’re unable to buy a new house for at least three years, meanwhile the bank keeps all the money you’ve been paying plus they get to claim the foreclosure with the insurance so they get all that money back and then they get to turn around a resell the house and make a profit off of that. Walking away is the dumbest thing you can do. It only hurts you not the bank.

          • NeverLetMeDown2 says:

            That could well make sense in a non-recourse state. In a recourse state, or if the owner ever refi’d the mortgage, then it’s a much less attractive proposition.

            • Loias supports harsher punishments against corporations says:

              Question: Do business take the same risk in those states as individuals? If a company backs out on a property lease/mortgage, do they have to pay the difference in any fire sale or auction?

              • lyontaymer30 says:

                Depends on the state, the type of loan, how much is left and probably 5 other things. Sometimes the gov’t investor will take over it out of the hands of the lender if they have a stake in it. But more than likely it’s not the same as an individual.

      • AcctbyDay says:

        Are you saying this because you are “underwater” on your mortgage and want your principle reduced?

        I only ask because reducing principal on mortgages is very similar to giving the OK to irresponsible borrowing. I’m not saying the lenders aren’t at fault for predatory lending, but if you borrow money you are obligated to repay it. Buyers remorse for overvalued assets is just part of the risk you take in purchasing a home. This is identical to purchasing a car and being unhappy with when the price drops. I WANT MY PRINCIPAL REDUCED TO PRE-DEPRECIATION VALUE, I’M A VICTIM.

        I’m not a fan of the banks, but the system will fail in no time flat if each and every individual borrows money and then has a principal reduction. Imagine if every person in an entire city borrowed 500,000 from the bank to purchase a home and immediately wanted their principal written down 250,000 because home values changed. The banks that lent the money would fail and it would make the situation worse. I think someone needs to be punished at these banks for their practices, but the practices of borrowers who knowingly refinanced in order to cash out phantom equity should not get away scott free.

        This response here in the article “He suggested other steps instead to help the housing market recover as a whole, like streamlining the refinancing process, and enhancing short sale procedures.” is the very crux of the matter. If the refinance process is simplified and it’s easier and less costly for those people who are having true mortgage problems to refinance into rock bottom rates then a large portion of individuals will be helped. I refinanced my mortgage from 5.375 to 3.375 percent interest and was able to convert from a 30 year to a 15 year note while having my payment only go up a whopping $30 a month. If I would have kept the 30 year term, my payment would have gone down. This is what will help people, getting their interest rates changed and perhaps extending the repayment in terms of years to help the monthly payment.

        No more freebies, I’m tired of watching waste happen and it needs to stop with this victim mentality from this mortgage crisis. Yes, the banks are at fault but so are the borrowers.

        • Smiling says:

          My thoughts exactly. Investments aren’t a for sure thing. Some people buy high, some low. Some lose, some profit. We shouldn’t be such a nation of babies that we expect to be bailed out every time we make an “investment” that doesn’t pan out. That’s not how being a grown up works. If you pay too much for something, you cut your losses and suck it up. Luckily for our country, foreclosures aren’t looked upon like they used to be. So, you get foreclosed on. Rent until you can get another home loan and deal with it. I know that even the luxury apartments around here will rent to you if you have a foreclosure. Financial mistakes are not the end of the world. You can continue to live in a nice place and still be more comfortable than 95% of people in the rest of the world. You still get to keep you cell phone and iPad. You still get to have food on the table. I don’t think we can learn our financial lessons unless we are forced to deal with the consequences.

        • JJFIII says:

          Exactly, so MORE people should make smart business decisions and walk away from their mortgages. They are under NO OBLIGATION to continue to pay them. The bank lent you the money based on the value THEY assigned to the home. I see nothing wrong with a person making a smart business decision and cutting their losses. Businesses do it every single day.

          • frank64 says:

            It depends on the state as far as obligation to make up the difference goes. Some states allow banks to.

            Then you have the problem of where do you live? If you turn in your home you won’t be getting a new one soon, and often rents are more than a mortgage. If someone is under water it might make good financial sense to ride it out. It doesn’t matter what you house’s value is now, it matters when you sell it.

            I am not concerned with banks taking losses, they did take a risk, but it doesn’t absolve the borrower from having some responsibility too. I know you would like to put it all on the banks though.

          • frank64 says:

            Here is a link to an article about recourse mortgages. In some states the bank can go after the borrower for the difference.

            http://www.loansafe.org/forum/foreclosure-laws/4130-recourse-v-non-recourse-states.html

          • cris3429 says:

            You have absolutely no idea what you’re talking about. It’s a terrible decision. The bank could care less if you default, they’re insured against it. All you’re doing is hurting yourself. It doesn’t matter what the bank assigned a the value, you still bought the house. It’s your responsibility regardless if whether you have equity or are underwater if you can’t make your payment that’s your fault not the banks.

            • Loias supports harsher punishments against corporations says:

              “It’s your responsibility regardless…”

              No, it’s not. You have a legal right to walk away. There are consequences to that decision, but it IS in fact an available decision. In some cases, the consequences are outweighed by the benefits. Sometimes not. Your situation may vary.

        • ChuckECheese says:

          The system will fail with or without principal adjustments. The system is still too awash in unpayable debt and overvalued homes. The bureaucratic obstructions of the banks only deny the reckoning. Moreover, the economy now has other problems as a consequence of this burst bubble, and fewer people have the means to pay mortgages whether they’re overvalued or not.

          Your “solution” is far more unrealistic than mine, because yours requires people come up with huge amounts of nonexistent money (the banks have it all) to pay off loans that are too large to pay off with the existing wages. My solution relies on compassion and on creating a sane base of value for property once again, and freeing up household cash for spending in the greater economy. If you’re so worried about freebies, why aren’t you outraged at the bank bailouts?

          And your concept of suffering/sin is so individual. Individuals must suffer “consequences” for their bad “actions.” All you look at is the individual actor, and your analysis ignores more complex and more evil institutional actors. By the way, all of society has been suffering from this financial crisis, including people like myself who have never, ever owned a home or real estate. If only overvalued mortgages could be paid for with self-righteousness.

          Social collective suffering such as we’ve been through should be enough for any sadist, but no, you sit in your aerie and suck your teeth at those irresponsible people you are so clearly superior to. Enjoy your schadenfreude while the entire world crumbles around you. The rot will reach your tower, and everybody’s, soon enough. A fraudulent loan based on fraudulent speculation should not be paid. It should be taken out back and have a bullet put through its head.

          • AcctbyDay says:

            The banks should have been allowed to fail, did I say that they shouldn’t have? Nothing in my argument said that the banks were in the right for their part in this, however it takes two to create a mortgage and quite frankly sitting on the sidelines and saying that “fraudulent loans” should be cancelled does what to solve the problem? Does the borrower get to keep the home, but have the loan erased or does it mean the bank gets the home and the borrower gets to walk away without any recourse? What happens, I ask because I want to flesh out your side of the argument more so than “you’re sitting on your high horse get off!”. I offered a concrete solution which is to make it significantly easier to refinance, the article also mentions easing short sale requirements. I did not endorse that specifically, but I will do so now. If a short sale has the bank lose some money on the deal but not much that is also a viable solution because it keeps the economy moving forward. That is a much better solution than cancelling the loans, because pray tell oh wise one – does the person who sold the house have to return the money they received? How far back do you want to go to unwind this fraudulent transaction? How much red tape and lawyer-ing will result if everyone who fell “victim” to these types of loans has to go to court to prove it was fraudulent and figure out some kind of recourse?

            I’m not saying your solution is wrong, per se, but how do you plan to execute? How is your solution going to be efficient in either getting people to stay in their homes or move onto more modest homes by short sale to get out? If you want to point out what’s wrong, give me some kind of path to fix it that is not impossible, otherwise I’m going to agree with the plan that leaves the borrowers either fulfilling their obligations or closing said obligation with minimum ease and less loss to the bank and moving on.

            I don’t like the banks who caused this, but if the banks cease to make loans what happens then?

            • ChuckECheese says:

              In the 1930s in the U.S., we were facing a similar set of real estate problems. A large chunk of overvalued homes on mortgage were reassessed at no more than 80% of their current assessed value, then the mortgages were re-written. It seems to have helped the entire depressed economy at the time. Iceland did something similar recently. When talking about moral hazard, remember it was originally the banks that knew they’d be taking on no risk underwriting these loans, not the homeowners.

        • lyontaymer30 says:

          While I know predatory borrower exists, the problem I have is that they couldn’t do it without the borrower’s signature, agreement and okay. It takes two to tango and one partner wants to put all the blame on the other. People will agree to terms and never read the contract and then 3 years down the line when they’re in trouble, they want play the victim card. And homes are investments not sure things, never have been. People who should just rent want to live beyond their means.

          • Loias supports harsher punishments against corporations says:

            It takes two to tango. So if one partner suffers while the other thrives in the same evil deal with the devil, you think it should be left as is?

            • lyontaymer30 says:

              If one is a corporation and one is an individual, it should not be the same. It sucks to say, but just like saying sacrifice a family of 5 or sacrifice a company of 500. If you had to choose, which would you choose, I definitely wouldn’t choose 5. It’s not as simple as just giving people money to help, you have to think of the marco consequences of the country and the industry itself.

              • ChuckECheese says:

                Um, in instances across the world (including in the U.S.) where mortgage relief plans have been put into place, it has helped the economy as a whole recover from depression. Clearly the current situation in the U.S. isn’t working out for too many people.

        • dush says:

          The main arguement is the taxpayers spent a lot of money to make sure the banks got back value for their devalued paper. So why can’t the banks now spend money to give back value to the homeowners for their devalued property?
          The property devaluation was essentially caused by the banks practices. Plus by providing that value back and keeping people from foreclosing the banks would probably save much money in the long run not having to deal with that. Lower principle means lower payments means more people can afford to keep paying. Many less properties go vacant so there wouldn’t be a glut of home inventory to drag down the market. It’s probably too late now but if the banks would have just passed on the savings the mess could have been lessened.

          • lyontaymer30 says:

            Some times I wish the gov’t would do that just so everyday citizens would see just how bad an idea it is to do that. Just so they could see the reprecussions and after never ask the gov’t to do it again.

  2. Smiling says:

    Good. Giving people a free ride for paying too much for their homes on the backs of tax payers is not something I support. Let them lose their homes or continue paying on the mortgage they agreed on. All of the foreclosures will drive the price of houses down even more, which is great for those of us buying in the next few years. The prices will even out to where they need to be before they were artificially inflated. Bailing people out will only keep home prices artificially inflated, and it gives some tax payers a benefit many others don’t get all because they paid too much for their house. Owning a home is not a right like eating and healthcare, therefore people don’t have a right to have their mortgages paid down by the rest of us. Let the market work itself out. Yes, I get that this still costs taxpayers money, but at least people aren’t getting a partially free ride on something that isn’t a necessity.

  3. benminer says:

    I just closed on my refi yesterday under HARP 2.0. I was unemployed for a year and a half between 2008 and 2010 and managed to stay current because we tightened the belt made made sure the mortgage got paid before everything else. Why should irresponsible people get their balance reduced? That makes me feel like all the sacrifices we made were for nothing.

    • jeepguy57 says:

      Exactly (and props to you for being responsible and doing the right thing).

      My wife and I borrowed $320k on our house which is still a nerve wracking amount, even though we were qualified to borrow up to $600k. Yes, $600k! we could never have made the payments on that long-term and we knew it.

      Why should idiots who borrow more than they can handle get a break? Give us all a break then? Drop mine down to, um, $250k sounds fair. Thanks.

  4. Lyn Torden says:

    Principle reduction, or even many other mortgage modifications, really won’t work very well. Some people would definitely benefit. Overall, however, DeMarco is right.

    There is another idea I have. That is to push the banks to just go ahead and make a decision whether each homeowner will be allowed to keep their mortgage, or move forward in foreclosure. The idea here is to just get the problems over with sooner so we can find a day when it’s behind us and the economy can move forward again. The economy cannot move forward as long as the “more foreclosures to come” cloud hangs over.

  5. toadboy65 says:

    Only bankers should get a bail-out. The rest of you exist only to be preyed upon by the bankers.

    • frank64 says:

      The bankers didn’t actually get any type of bailout like a principle reduction. The banks had to take huge losses. They got funding so they could absorb the losses and paid it back. This is very much in line with the proposed streamline refinancing. I know banks evil, consumers victims is going to be popular here. The truth is more complicated.

  6. buddyedgewood says:

    Why should RE speculators be given a break? Hey, nobody forced you to buy that house you couldn’t afford, so now you gotta live with your failed investment.

    Gee, I wish somebody would give me a break on my failed investments! I bought FB stock and it was an epic fail… but I’m not complaining, I bought 100k shares of SIRI when it was .05. You take the good with the bad when it comes to investing. And yes, buying a house is an investment.

  7. cris3429 says:

    I sell new construction an it kills me how many people still don’t have a clue about the home buying process. Thank god we are affiliated with a bank that is conservative in its lending practices and doesn’t lend money to people who can’t afford it. I still have people coming in wanting to build a 300k house but have no down payment and then cry because they have to pay pmi, I’ve actually told people that if yet don’t like pmi then go get the 60 grand to cover the 20% down payment and you won’t have to. Then they realize pmi isn’t all that bad after all

  8. crispyduck13 says:

    First off: hello all you fine people! I’ve missed your aggressive banter and wit!

    Moving on…I guess I just don’t understand how this program to reduce principle will help things in the long run. I bought my house a year and a half ago and Zillow is telling me it’s worth 10k less than what I paid for it. Sure, that sucks, but I’m not sitting here thinking about how unfair it is that I’m “paying more than what it’s worth.” Worth is relative, and unless you’re on the edge of bankruptcy you need to calm the fuck down and either sell that house at a loss or suck it up because you can’t rent anything cheaper anyway and your mom’s basement isn’t big enough for your family of 4.

    He suggested other steps instead to help the housing market recover as a whole, like streamlining the refinancing process, and enhancing short sale procedures.

    Now those are things that could actually help. Ever try to buy a short sale property? It’s fucking hell, and I didn’t even get through to the end. Can’t imagine how frustrating it is for the homeowner who keeps paying a mortgage they can’t afford each month the bank enjoys the view inside it’s own ass.

    • ChuckECheese says:

      Glad you’re only $10K underwater. How about somebody who bought a 2 bedroom condo in Phoenix for $375,000, which is now appraised at $38K? Or more modestly, somebody who purchased a 3 BR, 15-year-old home in the suburbs for $280K but it’s now worth $120K? These ridiculous prices, and the mortgages attached to them, were created by and for the benefit of the banking industry, not individuals. Let the banks fail and the people thrive.

  9. lonestarbl says:

    People signed the dotted line and for the most part… (if they read the fine print) knew what they were getting into. Instead of giving the a free ride while the rest of us go about our debts and daily business… reduce their rate by stretching out the duration of their loans. They’ll end up paying more in interest in the long run, but would attain lower and more affordable rates. Win/Win

  10. AtlantaCPA says:

    Wow! This article should win most discussed since each comment averages 1000 words! I’m in the “too bad you owe more than your house is worth” crowd. If you finance the purchase of a car, chances are you owe more than it’s worth for most of the time you’re paying it off. The difference with a house is it’s not mobile, so you if you get a job out of state you may have to sell when you’d rather not. For that reason I propose: Someone should come up with a program to loan people money who still owe for a reasonable rate (like close to mortgage rates). Let people sell their houses for the market price, and if they owe more than it sold for, let them roll the negative equity into their next home. Sure, financing negative equity is risky, b/c the new home will be “underwater” but it just doesn’t matter if you’re underwater on a home you plan to live in.

    $0.02 contributed.

  11. Mollyg says:

    This is not about giving people free rides, or bailing out bad investments, it is about helping people caught up in circumstances beyond their control. In the decades before the bubble collapse, if you lost your job, or had to move or your circumstances changed, you sold your house and moved on, and you could pay off your mortgage with the sale, even if you had to take a loss on some principle. Now, you can’t do that. You are stuck with your house and there is not a darn thing you can do about it. These people did not cause the bubble, and they should not be the ones to be ruined because of it.
    This is about helping people who are also victims.

    • ChuckECheese says:

      Indeed you are correct. What the moralizing whiners are missing is your point, which is that the bloated mortgage-outlay requirements of the current overvalued market are like a stick jammed in the spokes of the economic wheel, preventing any new movement in the economy.

    • lyontaymer30 says:

      Using the word victim is a bit overdramtic, don’t you think? Using your logic, because I lost money on my stocks, I should get that money back. I didn’t cause the market to crash or go down, so shouldn’t I get help? Or I should get the money back I already paid on my car since it depreciated over the last year. An investment has good and bad times, you can’t take one without the other. A house is not and never has been a sure thing, for some reason people want to act like it is.

      • AcctbyDay says:

        I have two or three very intelligent friends who refuse to buy a home for this specific reason. They cite that a home is not a good investment and refuse to make that type of outlay. I feel opposite in so far as it may not be a good investment, but a good way to lock in low rent/mortgage for however long you are willing to live there.

        I would never open up a mortgage I couldn’t afford, which is what a lot of these folks did. If you cannot afford to make payments, you shouldn’t take the mortgage out. The banks are just as much to blame, but if it says $2,500 a month when you take the mortgage you cannot be surprised if you have to continue making that payment.

        The home values dropped and that sucked, but opening a mortgage is your agreement that the home is worth that much. By signing on the dotted line you are attesting to the fact that you think the home is worth x. If this changes, that sure sucks but no one forced any of these home buyers to agree to buy a house they couldn’t afford. I have yet to hear about a mortgage lender holding a gun to a borrowers head.

  12. soj4life says:

    Aren’t loan by fannie and freddie capped at a certain loan amount and also ltv? Those measures would help both lenders from having as many borrowers default and also lose as much when a house is foreclosed on.