Lenders Pressed to Write Down Loans
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- Peter King | December 08, 2010
The Obama administration is pressing Fannie Mae and Freddie Mac to participate in a new program designed to reduce mortgage debt for homeowners who owe more than their property is worth, the Wall Street Journal is reporting.
The new program, launched by the Federal Housing Administration in September, provides incentives for banks to write down “underwater” mortgages by at least 10 percent. Called the FHA Short Refinance Option, the program’s goal is to reduce the likelihood of default or foreclosure for those homeowners, and thereby help prop up the housing market as well.
However, the WSJ reports that only a handful of mortgages have been modified under the program during its first three months. Since Fannie Mae and Freddie Mac back the majority of U.S. home mortgages, it’s thought their participation is essential for the program to get any traction.
The two government-backed lenders are said to be leery of the program, which could add onto the $134 billion in losses they’ve already incurred in the housing downturn. Fannie Mae has already declined to participate in the program, while Freddie Mac is said to be considering it.
But the administration apparently is not willing to take no for an answer and is said to be pressuring the two government-backed agencies through the Federal Housing Finance Agency, which is their regulator. The paper cited unnamed persons familiar with the negotiations as its sources.
The main incentive for lenders to participate in the Short Refinance Option is that, in return for marking down an underwater mortgage by at least 10 percent, it can then be refinanced into an FHA mortgage, with the FHA assuming any further risk. So the lenders can be sure of getting up to 90 percent of their money out of a loan that might otherwise default, as well as other financial incentives.
But so far, lenders haven’t seemed to find it that attractive, at least, not without Fannie and Freddie on board. The paper reports that only three mortgages have been modified under the program in the three months since it was launched.
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