Principal Reduction Effort Gains Considerable Steam from Unlikely Sources

Will the GSEs, of all sources, provide the much-needed momentum to get principal reductions off the ground?

The principal reduction, and whether the GSEs will embrace it as a central policy for aiding distressed borrowers, is undoubtedly among the most contentious issues facing housing right now, as Acting FHFA Director Ed DeMarco has resisted repeated calls from analysts and lawmakers alike to seriously pursue the policy. A couple new developments in the saga, though, could make the implementation of a principal reduction program all but inevitable.

DeMarco’s chief opposition to the program has involved finances. By reducing the principal on GSE loans, and effectively cutting the amount borrowers owe by thousands of dollars, Fannie Mae and Freddie Mac could lose a substantial amount of money, money that DeMarco argues the taxpayers would need to replenish through another round of bailouts. That argument had held off proponents of the policy for several months, but a new study – from Fannie and Freddie, no less – is contradicting DeMarco’s claims.

As reported by Pro Publica, the GSEs have conducted their own examination of the policy independent of the FHFA, and have concluded that principal reductions would not only keep hundreds of thousands of families in their own, but also that by avoiding foreclosure, it would save taxpayers a considerable chunk of change.

“Such loan forgiveness wouldn’t just help keep hundreds of thousands of families in their homes, it would also save Freddie and Fannie money,” Pro Publica’s report stated. “That, in turn, would help taxpayers, who bailed out the companies at a cost of more than $150 billion and are still on the hook for future losses.”

Written in conjunction with NPR news and broadcasted on the radio company’s popular “Morning Edition” program, the story has generated swift response, so swift, in fact, that lawmakers have called on the FHFA to provide Congress with the specific details of the GSEs analyses, and Illinois Attorney General Lisa Madigan has urged FHFA to immediately begin implementing principal reductions to suitable GSE home loans, according to an update to the story by Pro Publica.

Even without the analyses, though, influential employees at the GSEs were already indicating that the time seemed ripe for a principal reductions program.

As HousingWire examined in a recent story, Ed Haldeman, Freddie’s current CEO, said last week that in light of the Treasury’s January announcement that it would dramatically increase the incentive payments to mortgage investors who allowed principal reductions on HAMP workouts, the deal is almost too good to pass up.

“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% of what you could write down — it may be in our economic self-interest to participate in that.”

What do you think? Is the clock ticking? Are principal reductions inevitable, at this point?

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