New Treasury Plan Bypasses the FHFA for Principal Reductions

by Chicago Agent

The Treasury Department is ignoring FHFA resistance and pursuing principal reduction plans anyway.

Principal write downs have emerged, in the past month, as one of the major controversies on Capital Hill, with Congressional Democrats and the White House lobbying for such a program from the Federal Housing Finance Agency (FHFA) – and the agency’s Acting Director, Edward DeMarco, steadfastly refusing.

Some lawmakers have attempted to replace DeMarco, but recent developments would seem to suggest that the Treasury Department is approaching the FHFA’s resistance in a more subtle manner.

According to a recent National Mortgage News piece, a new plan from the Treasury Department would expand the Home Affordable Modification Program (HAMP) to cover principal write downs via dramatically increased incentive fees it would pay to investors who reduced mortgage principals.

The expansion would include mortgages insured by Fannie Mae and Freddie Mac, the two GSEs that the FHFA regulates. According to the story, the GSEs will receive the aforementioned payments “if they allow servicers to forgive principal in conjunction with a HAMP modification,” said Treasury Assistant Secretary Timothy Massad. A HousingWire story on the plan put the new payments as high as triple the normal rate.

Though implicit by nature, the new plan represents the most forceful challenge yet from the Treasury to the FHFA, the latter of which has resisted calls for principal write downs on account of the damage they would cause to Fannie and Freddie’s balance sheets; already, the two firms have received roughly $151 billion in taxpayer funds to stay afloat.

The Treasury would use leftover HAMP funds – some $40 billion – to cover 16 to 63 percent of the principal reduction costs, according to the story, which also collected some positive endorsements of the plan from Jack Reed, a Democratic senator from Delaware.

“I expect FHFA to promptly reconsider their analysis and help more Americans avoid foreclosure,” Reed, a member of the Senate Banking Committee said, adding the plan is a “positive step” to aid underwater homeowners.

Along with the expansions to HAMP, the program has also been extended by one year through 2013.

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