FHFA: Writedowns Would Cost $100B
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- Peter King | January 24, 2012
Writing down the principal on underwater mortgages, a move advocated as a way to stabilize the housing market, would cost Fannie Mae and Freddie Mac nearly $100 billion, according to an analysis by the Federal Housing Finance Agency (FHFA).
That would be too costly for Fannie Mae and Freddie Mac to undertake on their own without congressional approval, according to FHFA Acting Director Edward DeMarco.
DeMarco was responding to a request by members of Congress to explain why his agency was not pursuing principal writedowns as a loss mitigation tool to prevent underwater mortgages from sliding into foreclosure. In a letter to members of the House Committee on Oversight and Government Reform, DeMarco also said that principal forgiveness would be less cost-effective from taxpayers’ standpoint than the two agencies’ current policy of offering debt forbearance through loan modifications on troubled mortgages.
3 million underwater mortgages
As of last June, Fannie Mae and Freddie Mac held or guaranteed three million “underwater” first lien mortgages, where the balance due exceeded the value of the home. The FHFA estimated that writing down all these mortgages to neutral equity, so that the balance due equals the home value, would cost $100 billion in addition to the losses already incurred by the two government-backed lenders.
In its report, the FHFA asserted that simply being underwater did not mean a borrower would be unable to keep with his or her mortgage payments. According to FHFA figures, as of last June Fannie and Freddie held or backed about 1.4 million mortgages where the loan balance exceeded the home value by at least 15 percent. Of those, 1 million were current and 176,000 had been delinquent for at least one year.
Forbearance seen as less costly to taxpayers
The FHFA calculated that its current policy of granting principal forbearance, in which a borrower’s obligation to pay off part of the mortgage is deferred but not eliminated, and reduces the monthly payment to the same level as principal forgiveness would, is more cost-effective in terms of limited taxpayer losses, although it may not be as effective as principal forgiveness in preventing foreclosures.
Both Fannie Mae and Freddie Mac were placed under the authority of the FHFA when the two private, but government-created, lenders fell into government receivership after suffering severe financial losses in the subprime mortgage crisis.
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