Weitz Law Firm - 520 Kirkland Way, Ste 103 - Kirkland, WA - (425) 889-9300

Sunday, December 12, 2010

Fannie and Freddie consider principle reduction loan modifications

Fannie Mae and Freddie Mac are in talks with Obama administration officials to join fledgling government programs aimed at reducing loan balances of mortgages where borrowers owe more than their homes are worth, according to people familiar with the situation.

Weitz – while I commend the administration for trying to help out homeowners, I fear this would create a ‘slippery slope’. What about those that aren’t 'underwater', or those that have been renting during this crisis.

An agreement with the two government-owned mortgage giants to write down so-called underwater loans could reduce the threat to the U.S. housing market from the glut of homeowners believed at risk of default should their personal finances or home prices worsen. A deal would deepen losses at Fannie Mae and Freddie Mac, which already have cost taxpayers about $134 billion.

Weitz – Fannie and Freddie are explicitly backed by the US Government. Losses for them are irrelevant at this point.

Fannie Mae and Freddie Mac, which own or guarantee about half of all first-lien mortgages in the U.S., have been highly reluctant to reduce loan balances, especially for borrowers who are still making payments.

The Obama administration is pressuring Fannie Mae and Freddie Mac, through their primary regulator, the Federal Housing Finance Agency. The administration wants the firms to join a program run by the Federal Housing Administration that allows banks and other creditors, which agree to write down mortgages, to essentially hand off the reduced loans to the FHA.

Weitz – take note we’re going to use the FHA to absorb all these loses for banks, Fannie and Freddie. I’m OK with this, but would really want the banks to have share in the burden (rather than exclusively being the problem of the US taxpayer).

Federal officials estimate that 500,000 to 1.5 million homeowners could benefit from the program—a fraction of the estimated 11 million borrowers who were underwater as of June 30, according to CoreLogic Inc. That figure represents about 23% of all U.S. households with a mortgage.

Industry executives say the FHA program—as well as a related initiative by Treasury—will be only marginally helpful to the housing market without the participation of Fannie Mae and Freddie Mac. The program completed three loan modifications during its first three months and received 61 applications

Participation by Fannie Mae and Freddie Mac would put additional pressure on the nation's biggest banks to follow suit. Banks have shown little enthusiasm for the programs without the two mortgage giants.

David Stevens, the FHA's commissioner, said resistance by lenders has been exasperating. Obama administration officials have given lenders "a responsible way to address borrowers with negative equity, he said, "and if institutions are blatantly refusing" to participate, then that is "short-sighted."

The arm-twisting is the latest sign that loan-modification efforts aren't doing enough to address the threat that more borrowers will default on so-called underwater properties.

"Letting the status quo continue is going to be much more expensive than people think," said Kenneth Rosen, a professor of economics and real estate at the University of California, Berkeley. "We've got a downward spiral in housing here, and they'd better break the back of this with some shock and awe.''

Weitz – Mr. Rosen, what about allowing the market to self adjust. The government can do nothing but prolong the agony. Just look at the tax credit effectiveness...turns out it was a waste of taxpayer money.

The ongoing discussions underscore the sometimes awkward relationship between the Obama administration and FHFA, which has overseen Fannie Mae and Freddie Mac since their takeover in September 2008 and is charged with stemming taxpayer losses. An FHFA spokeswoman said participation in the FHA and Treasury loan-modification efforts is under review.

The two mortgage companies rarely reduce loan balances—only 10 of the 120,000 loans modified during the second quarter of 2010, according to the Office of the Comptroller of the Currency.

"We have historically counted on the fact that the vast majority of borrowers-even borrowers who are underwater-continue making their payments," said Don Bisenius, a Freddie Mac executive vice president.


Weitz – The question is how long people will continue to pay full price for a house that has dropped significantly in value. I’ve read articles that indicate when the home drops to 70% of the mortgage value, the chances of default rise dramatically…only time will tell.


Fannie Mae and Freddie Mac are reluctant to reduce principal because it limits their options to recoup losses. Typically, the companies collect claims from mortgage insurers or force banks to buy back certain loans when a loan defaults. Those options are relinquished when writing down loan balances.

In addition, Fannie Mae and Freddie Mac, along with other mortgage investors, are reluctant to approve principal reductions if banks that own second mortgages on the same properties also don't take losses.

Weitz – good point on this one. What’s the point of lowering balances on a first when a second still exists on the property that would keep the homeowner 'underwater'?

Unlike most loan-modification efforts, the FHA program is open only to borrowers who aren't behind on their payments.

Weitz- that I really like. An incentive that doesn’t benefit only those who default.

The Treasury Department initiative to reduce loan balances builds on HAMP, in which banks reduce monthly payments for distressed borrowers by lowering interest rates and extending loan terms.Starting in October, banks were able to receive additional subsidies if they first write down loan balances for borrowers owing at least 15% more than their home's current value. Fannie Mae has said it won't participate in the Treasury program. Freddie Mac says it is still reviewing whether to join.

Weitz - This is an interesting development that I will definitely keep track of and update the blog accordingly.

For more information on your options with distressed real estate, consider contacting a Seattle Strategic Default Attorney.

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1 comment:

  1. A loan modification to an existing loan made by a lender in response to a borrower's long-term inability to repay the loan.A lender might be open to modifying a loan because the cost of doing so is less than the cost of default. They may change interest rates, loan terms, loan balances, or other parts of the loan agreement.

    what is a loan modification california

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