FHFA leader Ed DeMarco has indefinitely put on hold the question of whether he will allow Fannie Mae and Freddie Mac to offer principal reductions to delinquent underwater borrowers. He’s actually said nothing about it publicly since April. But Nick Timiraos leaks out the details of a new study that shows the benefits of principal reductions are greater than FHFA first surmised:
In April, the agency said that loan forgiveness would save about $1.7 billion for the companies, relative to other types of relief. At the time, the agency said that because the Treasury was paying to subsidize those write-downs, the relief would still cost taxpayers $2.1 billion, offsetting any savings to the companies.
But the latest analysis done by the agency found that such write-downs would generate $3.6 billion in savings for the companies, under certain assumptions, according to people familiar with the analysis. Even after subtracting the cost of the Treasury subsidies, the program would save $1 billion, these people said. As many as 500,000 borrowers could be eligible, these people said [...]
The FHFA has raised other concerns beyond the cost of such write-downs. Chief among them is the fear that more borrowers, upon hearing that Fannie and Freddie are instituting a debt-forgiveness program, might default to seek more generous terms.
The numbers are better because they factor in the Treasury Department’s new incentives for principal reduction under HAMP.
I would argue that cost was never the problem for FHFA’s leadership. It was always the ideological objections that blocked principal reductions, which manifest themselves as fears over “moral hazard” or “strategic modifiers,” as DeMarco once called it. First of all, moral hazard never comes up for these people in the context of bailed-out banks, only homeowners. Second, no homeowner trusts his or her servicer, especially not after years of evidence, to modify their loan if they purposely go into default. Many homeowners purposely went into default – on the suggestions of their servicer – to qualify for HAMP, and were burned by the practice. I’ve talked to enough borrowers to know that nobody would take that initiative on their own, and they really won’t now, after seeing years of results.
Timiraos’ article, though it enchanted Jared Bernstein, doesn’t give us any indication that DeMarco is close to a decision on principal reductions; it just cites this new study from FHFA. DeMarco has skated by for this long, I don’t see why he wouldn’t delay a bit longer.
In addition, I don’t want to spoil a big article I’m going to have coming out soon, but Timiraos and housing advocates who have been pushing principal reductions at Fannie and Freddie for some time are missing a huge time bomb set to go off that would defeat the entire purpose of debt forgiveness. And only Congress can fix it. I’ve reported on it before so it’s no secret, but that’s all I’ll say for now.
Timiraos also has a useful article about principal reduction more generally (even though it calls Tom Lawler, the former Fannie Mae chief economist and incipient fraudster, an “independent housing economist.”) He makes this excellent point:
Housing demand also suffers. Without equity, young families are less likely to trade up to bigger places while empty-nesters may be unable to downsize. Perversely, in some of the hardest-hit markets, home prices appear to be stabilizing because there aren’t enough homes for sale—in part because so many homeowners are frozen in place.
Keep that in mind when you look at today’s Case-Shiller numbers. Shadow REO also has a lot to do with it.