Mass. Attorney General Martha Coakley warned government-sponsored mortgage giants Fannie Mae and Freddie Mac to comply with the Bay State's recently passed loan modification law, in a letter sent to the head of the Federal Housing Finance Agency.
The Massachusetts law, signed by Gov. Deval Patrick earlier this month, requires creditors to take commercially reasonable steps to avoid foreclosure on certain mortgage loans. Recently, the FHFA, which manages Fannie Mae and Freddie Mac, officially refused to practice principal forgiveness, Coakley said.
"We expect Fannie Mae and Freddie Mac, like all creditors, to comply with these statutory obligations as they conduct business in Massachusetts," Coakley said in her letter to FHFA Acting Director Edward J. DeMarco. "Specifically, we expect that Fannie Mae and Freddie Mac will pursue common-sense loan modifications for borrowers when the economic benefits of a modified loan exceed the significant losses anticipated at foreclosure. These loan modifications are critical to assisting distressed homeowners, avoiding unnecessary foreclosures, and restoring a healthy economy in our Commonwealth."
Coakley said the FHFA recently decided not to implement the Home Affordable Modification Program Principle Reduction Alternative after the agency's own study concluded that "principal reduction leads to a 20 percent reduction in re-default probabilities as compared to a modification utilizing forbearance, and principal reduction leads to a 24 percent reduction in re-default probabilities as compared to a modification that receives payment reduction, but neither forgiveness nor forbearance."
"This data demonstrates that, in appropriate cases, loan modifications providing principal forgiveness can help struggling homeowners avoid foreclosure, save taxpayers' money, and work to stabilize the housing market -- all stated goals of the FHFA," Coakley said.
In April, Coakley and 10 other state attorneys general sent a letter to DeMarco seeking relief for homeowners that argued the failure to implement principal loan forgiveness hurts struggling investors and homeowners.
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