More On Principal Reduction: A New Initiative From the White House That Should Help Clear the Path

January 27th, 2012 at 5:46 pm

As I wrote the other day, reducing principal on homeowners with underwater mortgages is one important way to help them avoid foreclosure and help the economy get better faster.  It’s not for everyone—some homeowners simply bit off too much house.  But there are millions out there for whom this could work.

In this regard, I like the look of a new initiative by the White House just released this afternoon.  First, they’re sharply increasing the incentives—by a factor of three—in the part of their loan modification program (HAMP) that nudges the investors that own the loans to write down the principal.  Owners of loans used to get 6-21 cents on the dollar to write down principal; now they’ll get 18-63 cents.

Second, for the first time, they’re offering these incentives to loans held or insured by the GSEs (Fannie and Freddie).

A big boulder in the path to principal reduction has been the reluctance of the GSEs regulator, the FHFA, to play along—i.e., to reduce principal on the loans that Fan and Fred hold or insure.  And HAMP principal reductions were off limits to the GSEs. 

Well, according to the White House, they’re not off limits anymore:

To encourage the GSEs to offer this assistance to its underwater borrowers, Treasury has notified the GSE’s regulator, FHFA, that it will pay principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.

Now, FHFA acting director Ed DeMarco has consistently resisted reducing principal for reasons I discuss in the link above.  But he’s also said he’d go there if there were incentives to do so—some way to mitigate the losses to the agencies (and the taxpayers) from the loan forgiveness.  

Well, here it is, Ed.

I get and respect the impetus of the FHFA to protect the taxpayer, but the best predictor of default is an underwater mortgage in a tough economy.  Principal reductions can quickly help move a homeowner from distress and default to sustainable affordability, and that too helps the taxpayer, the homeowner, and the economy.  

We should always be mindful that many of these modification programs have underwhelmed, and if investors, servicers, and especially the FHFA fail to respond to these new incentives, this one will too.  So step it up, folks.  Let’s try this.

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5 comments in reply to "More On Principal Reduction: A New Initiative From the White House That Should Help Clear the Path"

  1. cat says:

    I find it disappointing that the president is trying HAMP 2.0 given how HAMP 1.0 lead to abuses against HAMP participants by participating banks and how little insight the public is allowed into it.

    a web serach on “HAMP abuses” will show many more examples that will make you question the HAMP program IMHO.

  2. Michael says:

    Since the problem is multiple mortgages, this isn’t as useful as you think it is.

    The problem is the attitude you have — that all of this is a morality play. Why is it “too much house”? Why are we zoned for “too much house”? But we know who’s to blame — the homeowner! Accountability is for the little people.

    • Neildsmith says:

      It isn’t a play… but this is about morality. Everything is about morality. We are throwing good money after bad in the off chance that some of these so-called homeowners will suddenly start spending money they don’t have… again. We might as well buy them all lottery tickets. Instead of these endless schemes, just foreclose and get it over with. Put your energy into creating a robust rental sector. It is just plain silly… stupid… insanely nonsensical to continue these disastrous policies that promote the home mortgage business. Real estate agents steal 7% of every sale. Mortgage brokers are con artists who prey on unsuspecting borrowers. And the banks and securitizers… are just plain despicable.

      Instead of reviving the housing market we should destroy it so they never do this to us again. GRRRR!

  3. Peter Thom says:

    It never ceases to amaze me that the very people who applaud the use of the bankruptcy laws, allowing a company like AMR, parent company of American Airlines, to write off about $30 billion in debts for pennies on the dollar are those who begrudge homeowners the same ability to escape debt. The vast majority of homeowners who are underwater and/or facing foreclosure did not take on subprime loans. It was basically gambling by banks at 30-40/1 ratios that tanked the economy and put these homeowners underwater. So if one wants to apply a Calvanist framework to this crisis, the bulk of the blame does not fall on homeowners, but on those who have already been bailed out.

  4. the buckaroo says:

    …seems to me that if a Republican were to be residing at 1600, this would be a fait de complet, verdad? Keep hammering on this…it is the biggest drag on the economy, this principal thing.

    It would be a step, albeit a baby one, toward recovery. I still believe only a massive undertaking in the retrofitting of all private homes with alternative energy applications (nano-tech wind turbines & solar devices of all description) & connected to a smart grid (& in conjuction with fiber optics) generating power for said grid during the day. At night, the reverse provides the juice for the electric hybrid & home appliances, etc. Used as a bridge toward future technological advances allows the weaning period to lessen the shock of conservation measures.

    Disallow a patent on new battery technology to breakdown the barriers & allow cooperation & collaboration…a cash prize could be grease the effort. Or a percentage scheme rewarding & crediting the participation. Whatever it is, the impediments of greed are stalling the advances in alternative energy & storage.

    Such a public works project would involve every unemployed worker for 20 years out. Demand is back, foreclosures halt…everybody is happy, except the R’s. I also feel the factories making the turbine, panels, inverters, et al. should be financed with bond & or government money & be co-operatively owned & operated. Sell the factory later to the Bain Group & off into the sunset we ride.

    We need a plan to adopt this conversion…keep pounding, JB. I’m usually not this winded, sorry.