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FHFA Refuses Principal Reduction for Fannie, Freddie

FHFA 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 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.”

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.

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.

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