Regulator blocks US mortgage relief plan
By Robin Harding in Washington
The Obama administration’s hopes of
a new debt forgiveness programme at Fannie Mae and Freddie Mac, the government-backed mortgage
companies, have been dashed even though their regulator found it could save public money in some
scenarios.
“FHFA has concluded that the
anticipated benefits do not outweigh the costs and risks,” said Edward DeMarco,
acting director of the Federal Housing Finance Agency, the independent
regulator that controls Fannie and Freddie, on Tuesday.
The announcement cripples one of the
only policy options that Mr Obama had left to support a stumbling US economic
recovery. Reducing principal on mortgages worth more than the underlying home
could reduce defaults and foreclosures.
The FHFA’s move drew an immediate
response from Tim Geithner, the Treasury secretary, who said in a letter to Mr
DeMarco that his agency had selectively cited its own numbers and made the
wrong decision for the country.
“In view of the clear benefits that
the use of principal reduction by the GSE [government-sponsored enterprise]
would have for homeowners, the housing market and taxpayers, I urge you to
reconsider this decision,” wrote Mr Geithner.
The Treasury had been pushing the
FHFA to take advantage of an administration scheme called the Home Affordable
Mortgage Programme Principal Reduction Alternative (Hamp PRA).
In an important shift, the FHFA
found that in some scenarios, having Fannie
Mae and Freddie Mac use Hamp PRA could save some public money.
Previously it had estimated that principal reductions would mean losses for
taxpayers.
The two housing finance agencies,
which dominate the US mortgage market, were taken into conservatorship during
the financial crisis so their profits and losses are largely born by the
public.
In its most favourable scenario, the
FHFA found that principal reductions could save $1bn, with 497,000 borrowers
potentially eligible for a loan modification. But that would only happen if
there were 100 per cent take up. With more realistic take-up rates, the FHFA
estimated the benefit would be between $100m and $500m.
FHFA argued that benefit could
easily be offset if a few borrowers responded by choosing to default in search
of a principal reduction. “The range is 3,000 borrowers to 19,000 borrowers,
which we consider to be a very small number,” said Mr DeMarco.
He said that such moral hazard risks
would be especially large at Fannie and Freddie because they work with more
than a thousand mortgage servicers, so they would have to publish the detailed
criteria for debt forgiveness.
The FHFA also pointed to tens of
millions of dollars of implementation costs at the two agencies and said that
it could cause some troubled borrowers to reject a modification today while
they waited for debt forgiveness to become available.
“In summary, our modelling results
alone suggest that the projected impact of adopting Hamp PRA could be negative
for taxpayers, or it could be positive for taxpayers,” said Mr DeMarco.
Separately, the FHFA updated its
guidance on warranty requirements for refinanced loans sold to Fannie and
Freddie, which are seen as one of the big road blocks to more households taking
advantage of low interest rates.
“This will shift the focus of loan
quality review to the time a mortgage is originated and sold to Fannie and
Freddie rather than the time of default,” said Mr DeMarco. “We expect that
implementing this change will give lenders greater certainty that loans
performing successfully for a period of time will not be subject to repurchase
except for very limited reasons.”
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The Financial Times Limited 2012. You may share using our article tools.
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