Will Fannie and Freddie finally be making mortgage principal reductions now that their own analysis shows that doing so would benefit their own financial health—and make them better able to repay billions owed to U.S. taxpayers?
My last blog described Fannie and Freddie’s conflicting purposes: to make home ownership more accessible, but to do so profitably for themselves. And I showed how this inherent conflict has led to a political dispute between the Obama Administration on one side pushing for greater flexibility in helping distressed homeowners keep their homes—and specifically to allow principal reductions, while on the other side Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA) and Fannie and Freddie’s overseer, disallowing principal reductions in order “to preserve and conserve [Fannie and Freddie’s] assets.”
Helping Homeowners Also Helps Taxpayers
But what if there is no conflict between these purposes? What if reducing mortgage balances would help hundreds of thousands of homeowners stay in their homes and at the same time would save money for Fannie and Freddie?
That is the conclusion of a very recent not-yet public analysis by Fannie and Freddie presented to the FHFA, according to the ProPublica article: “Fannie and Freddie: Slashing Mortgages Is Good Business.”
The new analyses by Freddie and Fannie were done to assess the new financial incentives that the Obama administration announced in late January. … . The companies now find that reducing principal on troubled mortgages has a “positive net present value” — in other words, that doing it would bring in more money for the companies over the life of the loans than not doing it.
The two companies’ analyses showed that upwards of a quarter million borrowers who owe more on their mortgages than their homes are worth could benefit from principal reductions. The companies would take a loss upfront, but over the long run these mortgage modifications would save the companies money because they would lead to lower default rates.
DeMarco is thinking about it. In a statement he said:
“As I have stated previously, FHFA is considering HAMP incentives for principal reduction and we have been having discussions with [Freddie and Fannie] and Treasury regarding our analysis.”
But he also stated:
“FHFA’s previously released analysis concluded that principal forgiveness did not provide benefits that were greater than principal forbearance as a loss mitigation tool. FHFA’s assessment of the investor incentives now being offered will follow the previous evaluation, including consideration of the eligible universe, operational costs to implement such changes, and potential borrower incentive effects.”
DeMarco seems to be saying that this new analysis may well not change their policy. Why not? After looking at all their options (“the eligible universe”), and considering how borrowers would react to principal reductions (“incentive effects”), it seems to come down to “operational costs”—changes to their accounting and computer systems—which could outweigh the other benefits. It just might be too hard to change Fannie and Freddie’s operations so that principal reductions would work for them.
The Bigger Picture
So is the FHFA so institutionally ingrained with the short-term profit motive that it would reject Fannie and Freddie’s own conclusions about principal reductions being good for their long term financial health? Does it have SO little ability to adapt? Does the FHFA have such tunnel vision that it can’t give any consideration to the potential benefits to the national housing market, where home values STILL continue to slide? And where in DeMarco’s comments is there any hint whatsoever of compassion for the millions of Americans—about half of them under his control—at continued risk of losing their homes?