Political pressure backed with money can be very persuasive in
For several months the
Until recently FHFA acting director
In a speech last week, DeMacro conceded that the higher incentive payments make principal reductions cost effective for Fannie and Freddie. Analyzing a pool of 700,000 delinquent loans, FHFA officials estimate principal reduction modifications — compared to principal forbearance — would reduce GSE losses by
But DeMarco did not signal any intent to start a principal reduction right away.
The economist and career civil servant remains concerned principal reductions targeted on delinquent borrowers will create an incentive for other GSE borrowers to default. There are 2 million underwater borrowers with Fannie/Freddie loans that are current on their mortgages.
"Encouraging their continued success could have a greater impact on the ultimate recovery of housing markets and cost to the taxpayers than the debate over which modification approach offered to troubled borrowers is preferable," DeMarco told an audience at the
In considering whether the GSE should forgive principal, DeMarco said the agency will have to analyze the effects on current borrowers and operational costs. He plans to make a decision in a few weeks.
Thirty Democratic senators recently sent the GSE regulator a letter urging him to adopt a targeted principal reduction program. The senators asked FHFA to conduct an analysis where a reduction is offered to certain underwater homeowners – such as delinquent borrowers who don’t have mortgage insurance.
Republican senators have supported DeMarco’s resistance to principal reductions. The
“A broad principal reduction program would result in fewer investors who are willing to lend for housing finance, increase borrowing costs, and make credit tighter,” said ABA president and chief executive
A recent Comptroller of the Currency report shows eight national banks employed principal reductions in modifying portfolio loans and investor loans during the fourth quarter.
"OCC has long held the position that principal reduction can be an effective tool in the arsenal for loss mitigation," an OCC official said. Meanwhile, HAMP servicers completed 22,260 loan modifications in February and 20% of the modifications involved a reduction in the principal amount of the loans. The median principal amount reduced is
Starting in March, Treasury tripled its incentive fees and now it pays up to 63% of the costs of a principal reduction.
Treasury rolled out the HAMP principal reduction program in
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