Is there any real news to report on the GSE principal reduction front? It almost seems like the airwaves on this story went dead after around April 10, 2012. I’m a bit surprised this isn’t a bigger issue, given the number of wealthy (aka voter) households potentially impacted, whether as payers or recipients of unearned income,and that it is a presidential election year.
Fight brews over principal reduction for upside-down homes
Published: 25 April 2012 08:30 AM
By Brian Bean & Tim Hardin
Lawmakers, finance industry figures and The White House are ramping up pressure over mortgage balance reductions for distressed homeowners.
Christine Lagarde, managing director of the International Monetary Fund, called this week for principal reductions to help ease the global financial crisis and boost a worldwide recovery.
“The housing problem in the U.S. is something that needs to be addressed” and it is “a matter of urgency,” she said last week at the Brookings Institution in Washington, D.C.
Her message was aimed at Edward DeMarco, acting director of the Federal Housing Finance Agency, which oversees GSEs Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
DeMarco has overruled requests for principal reductions by GSEs, saying such a move could actually be a more costly solution and prompt homeowners who are not in distress to “strategically” miss payments.
“A key risk in principal forgiveness targeted at delinquent borrowers is the incentive created for some portion of these current borrowers to cease paying in search of a principal-forgiveness modification,” DeMarco said earlier this month at the Brookings Institution.
Eleven state attorneys general recently sent DeMarco a letter urging the FHFA to allow mortgage giants Fannie Mae and Freddie Mac to use principal writedowns as a workout solution to “preserve assets and prevent unnecessary foreclosures.”
The Obama Administration has pressured DeMarco to allow GSEs to utilize principal reductions, proposing triple incentives for lenders who participate. Obama even tried to have DeMarco, an independent appointee who does not report to him, removed from the FHFA. But his efforts were blocked by Senate Republicans.
Some lawmakers and banking industry officials oppose principal reductions, saying they’ll do more harm than good.
“Principal reductions create an incentive for a huge group of borrowers who have continued making their payments, despite lower home prices, to stop paying in hopes of principal forgiveness,” Frank Keating, president and chief executive of the American Bankers Association, said this week on The Hill online finance blog.
“A broad principal reduction program would result in fewer investors who are willing to lend for housing finance, increased borrowing costs and tighter credit availability,” he added.
Sen. Bob Corker (Tenn.), a Republican member of the Senate Banking, Housing and Urban Affairs Committee, said principal reductions punish taxpayers.
“The last thing the federal government should be doing is taking taxpayer money and creating a program that incentivizes homeowners to not pay their mortgages,” Corker wrote in a letter sent this week to DeMarco.
Officials from Fannie Mae and Freddie Mac last month sided with lawmakers in urging their conservator to consider principal reductions for the most distressed homeowners. Their requests came after the agencies reworked analyses to account for new triple financial incentives for principal reductions.
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