Is th glass half full or half empty?
FHFA prohibits GSE principal reductions
This week, Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, issued a statement that the FHFA would not direct the GSEs to implement the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA), which would have offered borrowers debt forgiveness.
In the statement, DeMarco says, “After extensive analysis of the revised HAMP PRA, including the determination by the Treasury Department to begin using Troubled Asset Relief Program (TARP) monies to make incentive payments to Fannie Mae and Freddie Mac, 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.”
This is significant news since a very high proportion of mortgage loans sold in the last 8 years went to government backed securities. So, those homeowners that are thinking about walking away from a home and mortgage because they are upside down on the loan to market value, have one less solution to consider in modifying a loan to stay by getting a reduction in the principal balance.
Truthfully, this just shortens the negotiation period by taking this out of the discussion. So few homeowners have actually received principal reductions the impact will be minimal. Most of the loan modifications completed more closely resemble a forbearance or work out agreement. The interest is reduced for a number of years and stair steps back up over time and the missed payments are added to the end of the 30 year loan making is 30 years + 8 payments.
An extremely small number of people got true modifications with reduced principal and interest rates and some of them had other recapture clauses in them if the property sold within x number of years.
It still amazes me that it took nearly a year to come out with an official policy for Fannie & Freddie - whether they would participate in the much touted HAMP (II) program. Soap box thought: another example of the Government dictating to business/owners/investors on how business would be conducted. Espousing how things will be fixed on the back of those obligated while completely exempting themselves from the solution they insist will make everything better........
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