Fannie, Freddie chief: No principal reduction
Edward J. DeMarco, acting Federal Housing Finance Agency director, says the mortgage giants will not use bailout funds to aid underwater homeowners. Treasury says that's a mistake.
Would cutting the principal of underwater mortgages owned by Fannie Mae and Freddie Mac help the housing market and economy? Nope, said Edward J. DeMarco, acting director of the Federal Housing Finance Agency, which oversees the two government-run enterprises.
Late Tuesday, DeMarco said that the mortgage giants would not heed the Treasury Department's suggestion to use Treasury funds to reduce homeowners' mortgage principal. The benefits of plan, DeMarco said, "do not outweigh the costs and risks." Treasury Secretary Timothy Geithner begged to differ.
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From Geithner's letter to DeMarco:
"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 (Fannie and Freddie) 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."
The battle comes down to numbers — and, of course, politics.
The government's expanded Home Affordable Modification Program has been aimed at cutting principal for borrowers who owe more on their mortgage than what their home is worth. But that program covers only loans backed by private investors. If Fannie or Freddie backs your mortgage, you're not eligible.
According to MarketWatch, Fannie and Freddie back or guarantee about 56% of all U.S. mortgages, and 11 million homeowners are underwater.
Thus, the scope of the aid has been limited. In the first quarter of this year, 10% of all mortgage modifications included a principal reduction. That was up considerably from a year prior, the Office of the Comptroller of the Currency said.
But more could be done, according to the Treasury. Its latest plan, which more than 100 members of Congress urged the FHFA to implement, would give the agency 63 cents of Troubled Asset Relief Program funds for each dollar of mortgage principal it writes down. Geithner cited FHFA analysis stating that write-downs could reach 500,000 borrowers — and that even if only half of them were affected, Fannie and Freddie would save $1.8 billion.
But with taxpayers already having kicked in $188 billion to keep Fannie and Freddie afloat, the write-downs may not be the right move, DeMarco said. In fact, he said, taxpayers would see no benefit if 3,000 to 19,000 borrowers who are now current on their mortgages take advantage of the program by strategically defaulting. Trickle-down impacts also could include "higher mortgage rates, reduced mortgage credit availability or both," according to an FHFA analysis (PDF).
Republicans have supported DeMarco's stance, while Democrats are among the backers of the Treasury plan.
— Tony Stasiek is a producer/editor at MSN Real Estate.
Grey Ghost You win the stupidest comment award. The financial markets were deregulated by the Bush administration. Republicans have been pushing deregulation for over 30 years now and it has not helped any industry. It has killed millions and millions of good paying jobs in favor of greedy corporations. Hundreds of thousands of great businesses have been knocked out of the market and replaced by greedy corporations strippng workers of benefits and decent pay.
The republican party represents big business, and big oil, and greedy banks. They have been raping our country for 30 years. The reason is because of stupid ignorant people like you that can't see the nose on your face. There is no good reason to vote for any Republican if your income is below $250,000.00 a year.
Republicans had it their way for 8 years with Bush and reduced taxes and where did it get us. It more than doubled our National debt and the biggest financial catastrope since the Depression. Now the Republican candidate for president is the worst liar in history but you are still stupid enough to support him. Romney is looking more like the Anti-Christ all the time. The Angel of Light adorns all Mormon temples. Satan will suredly come from the Mormon church.
If Romney is elected he will close tax loopholes. The ones used by the middle class like Mortgage tax deductions. No millionaire wil be touched by any of his tax loophole closures.
I was turned down for a HARP in Sep 09/ Too high a debt ration. We reduced it by 7 percent and applied for a conventional loan to reduce our 7.5% interest rate. Gee still too high a debt ration. Now, again all the agencies helping people to get HARP2 modiications are calling us. Still too 'high a debt ratio, why bother
. However, this program isn't for hard working folks who have good credit, in an upside down loan, and just need a reduction in interest.
For the last 36 months, we, who can't get help, to just reduce the interest rate, have paid in excess of $25,200 interest on our loan. They won't approve folks like us. We are their CASH COWS.
They know we will not let our mortgages not get paid. WE just work harder, and do with out, or go into retirement accounts to keep afloat.
If the homes are under $150,000 let Fannie Mae and Freddie Mac sell them to low income, not to investors.
Principal reduction? No. That's just giving away money. When the market rebounds, will those ppl that benefitted from reduction give back that money? If you bought your house as a Home, then it really hasn't lost value to you. If you bought that house as an investment, well then, too bad for you. Like many other investors, you have found out there are risks involved with no gauranteed return.
Having said that, I see no reason not to force the lenders to reduce the interest rate to today's historically low rate. That should allow some relief. The ony 'negative effect I can see would be the banks not making as much money (boo hoo for them), but they certainly wouldn't be losing money.
So where did the 188 billion dollars go? Bonuses and fat salaries.
FYI - what do you think happens if a home goes into foreclosure? It is then sold at the market rate, possibly a year down the road. Continuing to foreclose actually damages a home's (and surrounding homes) values. Certainly it is not sold at the over-valued loan balance! That figure is never recovered!
If the prinicipal on these homes that were worth 400K in 06 (but are now valued and taxed at $200K) is reduced to the true market rate via modification who really loses?
If a timely modification is made, the current mortgage holder should NOT NEED TO DEFAULT. That 400k home was generally at a 5 to 6 or more rate of interest. This actually saves the lender money - they could receive a timely ongoing payment from the borrowers, they need not invest in a huge foreclosure departments. Also, maintainging borrowers in over-valued homes maintains neighborhoods - I've visited areas where foreclosed homes sit with weeds and trash collects at these vacant and neglected properties or squatters take over - that can't be good for anyone! Allowing modifications secures property taxes for cities and thereby preserves city services.
Face it - if a foreclosure, preceeded by a default occurs, the banks/Fannie/Freddie et al - receive nothing for at least one year or much more, and they end by selling that home at the exact price of what a "modification." would have yielded.
The only "incentive" in withholding a modification is to "punish" the original borrowers. Penny wise and pound foolish.
Why not restructure the loans, extend the life of the loan up to 75 year loads, they always can be refinanced when the homeowner is in a better financial position. And reduce the interest to 3% or to the same interest the banks are paying their customers for keeping the money in their banks.
There is a lot of blame to go around and it not just the banks -
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.