A Step Closer to Principal Reduction at the GSEs

July 30th, 2012 at 11:03 pm

Well, well…this is potentially welcomed news.  According to hard-nosed-WSJ-housing-beat reporter Nick Timiraos, Fannie and Freddie’s regulator, the FHFA—which has heretofore argued that principal reduction was not something it wanted to add to the GSEs portfolio of loan mod programs, now finds that its benefits are considerably larger than they thought.

…a new analysis by the regulator suggests that taxpayers could actually benefit from the move, according to people briefed on the findings.

Fannie and Freddie could save about $3.6 billion more than current loss-mitigation approaches by reducing balances for some borrowers that owe much more than their homes are worth, these people said.

The Federal Housing Finance Agency is nearing a decision on whether to allow the companies to participate in the debt-forgiveness program that it consistently has resisted. Until now, the regulator has maintained that the current housing-rescue programs offered by the taxpayer-supported mortgage companies are less-expensive options.

As many as 500,000 underwater borrowers might be eligible for this new program, if the FHFA decides to go for it.  And at this point, assuming these early reports are accurate, it’s really very hard to see how they could avoid doing so without looking like they’ve just got a heavy, irrational thumb on the scale against reducing principal.

Those of us advocating for adding PR to the GSEs mod menu have never claimed it to be a panacea.  There are something like 11 million underwater mortgages, so we’re again talking about a program that may only reach a small share…less than 5%.  Applicants need to meet a number of eligibility criterion, most importantly “sufficient, documented income to support the modified payment” (see here under “eligibility,” though hopefully that first bullet will soon need to be deleted).

But PR has proved to be an important resource for helping certain folks to stay in their homes, avoiding foreclosure and, as FHFAs new analysis shows, saving billions for the GSEs and thus the taxpayers who are still supporting these agencies.

So if the GSEs are willing to give it a try, that would represent real progress in a very important area of our economy, not to mention in the lives of a lot of struggling homeowners—stay tuned.

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