Mortgage Principal Reduction on Freddie Mac Loans?
Freddie Mac CEO Charles "Ed" Haldeman gave a strong signal Friday that new incentives from the Treasury Department may be enough to start principal reduction on mortgages backed by the government-sponsored enterprises.
In January, the Treasury said it would triple incentive payments to mortgage investors who allow principal reduction in Home Affordable Modification Program workouts. The payouts ranged between six and 21 cents to the investors for each dollar forgiven under HAMP, but that will grow to between 18 and 63 cents.
"I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us," Haldeman said at HousingWire's REThink Symposium. "We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments -- which could be 50 percent of what you could write down -- it may be in our economic self-interest to participate in that."
There are currently 11.1 million borrowers who owe more on their mortgage than the house is worth, according to CoreLogic. Of that, estimates show roughly 3.3 million of those mortgages belong to Fannie and Freddie.
The GSEs and their regulator, the Federal Housing Finance Agency, long shunned principal reduction. Their biggest fear is moral hazard -- that borrowers who are still current on their underwater loan would strategically default in order to get principal written down.
"We thought principal reduction could have unintended, secondary consequences on other borrowers seeking the same kind of reduction," Haldeman said.
One previous analysis showed the GSEs would take significant credit losses if a wide-scale program was put in place. A new analysis from the FHFA, which would cover the new HAMP incentives, is expected to be released in the coming weeks.
NPR and ProPublica reported Friday that the analysis will show a reversal, that principal reduction will work for the GSEs under the new version of HAMP.
"As we complete the review, the public should understand that Fannie Mae and Freddie Mac continue to offer a broad array of assistance to troubled borrowers and have continued to implement HARP 2.0 to enhance refinancing opportunities for underwater borrowers," FHFA said in a statement.
Treasury Secretary Timothy Geithner told a House panel this week he and FHFA Acting Director Edward DeMarco were working out their differences.
Haldeman, who announced in October that he would leave his post at Freddie, said the principal reduction verdict will ultimately reside with DeMarco, but he isn't operating on his own.
"At the end of the day, we are in conservatorship, and he is the conservator. But the way it works on a day-to-day basis is that it's a very close collaboration. It is extremely rare that I had a different point of view than Ed DeMarco," Haldeman said.
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