Tuesday, July 31, 2012

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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It either may work, or may not, that was the conclusion!  /s/ Charles L. Basch II

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