Troubled homeowners whose mortgages are backed by Fannie Mae and Freddie Mac will not be allowed principal reductions to help save their homes from foreclosure, the overseer for the two agencies announced Tuesday.
Federal Housing Finance Agency Acting Director Edward DeMarco said he has concluded that a principal reduction component of the Home Affordable Modification Program "would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers."
The decision deals a blow to homeowners and to communities trying to move past the foreclosure crisis. Fannie and Freddie own or guarantee about 60 percent of outstanding mortgages. During the first quarter, 3.7 percent of Fannie Mae mortgages and 3.5 percent of Freddie Mac's were seriously delinquent, meaning payments were at least 90 days past due.
In January, the Treasury Department tried to boost the use of principal forgiveness, under which a portion of a homeowner's outstanding mortgage balance is forgiven. It said it was tripling the payments to mortgage investors who employ the program and for the first time, offered incentive payments to Fannie and Freddie to encourage the use of the program. For months, the FHFA had said it was considering it.
On Tuesday, DeMarco said that 74,000 to 248,000 Fannie and Freddie borrowers could be eligible for modifications that included principal forgiveness. "However, nearly all of this benefit is simply a transfer from the taxpayers to the enterprises, which would add to the over $188 billion in taxpayer support the enterprises have already received," DeMarco wrote. "Under other reasonable assumptions, implementing (principal forgiveness) would actually increase taxpayer costs."
The decision is likely to further delay a recovery of the Chicago area's housing market, according to Tom Feltner, a vice president at Woodstock Institute, a Chicago-based nonprofit research and policy organization.
In May, 10.44 percent of mortgages in the Chicago area were at least 90 days past due, according to housing data provider CoreLogic.
"That's extremely problematic for the Chicago housing market," Feltner said. "There's widespread recognition that principal reductions work. It delays a much-needed market correction and it's requiring states and municipalities to take much more drastic measures. That's why we've seen so much interest in seizing mortgages by eminent domain."
Officials in San Bernadino County, Calif., are looking into forcibly buying the mortgages of distressed homeowners through the power of eminent domain and then working with the homeowners to avoid foreclosure. Chicago Ald. Ed Burke has since proposed Chicago consider a similar plan.
The FHFA's decision drew a rebuke from Treasury. In a letter to DeMarco, Secretary Timothy Geithner said the FHFA's decision was not "the best decision for the country," and he urged DeMarco to reconsider. "Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes, and the legacy of the crisis continues to weigh on the market," Geithner wrote. "You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis."
According to Treasury, 75 percent of non-Fannie Mae and Freddie Mac mortgages that have been modified recently through the HAMP program contained principal reductions.
DeMarco said the agencies would take other steps to help the housing market recover, including streamlining the refinancing process, and enhancing short sale procedures.
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