Realty Check

New Housing Bailout? Try Old Housing Bailout


Please forgive my silence over the past week, but even housing has to go on a little summer vacation. Of course the rumor mill surrounding housing never does, so by last Thursday I found myself right back on the Bberry, trying to knock down some chatter about a new government bailout in the form of forced principal writedown by Fannie Mae and Freddie Mac.

Peter Gridley | Photographer's Choice | Getty Images

It all started with a Reuters article titled, "An August Surprise from Obama?"It suggests that a forced principal writedown program would be funneled either through the existing Home Affordable Refinance Program—which allows borrowers with current Fannie and Freddie loans who owe up to 25% more on their loans than their homes are worth, to refinance to lower interest rates—or through the Bush-era Hope for Homeowners program.

The H4H program goes through FHA and already requires lenders to write down principal, but it has helped next to no borrowers.

The article suggests that this new bailout would be forced by political pressure, "less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses."

The trouble is it doesn't make a whole lot of sense. First of all, Fannie and Freddie don't own all the loans they guarantee, and forgive me for not being a lawyer, but I'm not exactly sure that the government can just force investors to write down principal on loans those investors own.

"It's hogwash," writes mortgage consultant Mark Hanson, who rightly points out that the government is just now releasing guidance to lenders on its FHA short refi program (which includes principal writedown) and its largely GSE 3-year earned principal balance reduction program— both of which were announced last March and both of which are voluntary and require the consent of all lien holders.

FHA Commissioner David Stevens emailed me the following:

Just to be clear, we are seeing continued success through the existing HARP [Home Affordable Refinance Program]. Additionally FHA allows refinancing up to 97.76 percent for rate and term refinances. Finally, we will be rolling out our mortgagee letter for the refinance option for borrowers who are underwater in the very near term.

These options along with those that exist in HAMP offer a broad array of options for homeowners who may be in need and qualify and there are no other plans for expanding the refinance options at this time.

Next Tuesday the Administration will be holding a "conference on the future of housing finance", which, "will help provide critical public input as the Administration continues its work developing a comprehensive housing finance reform proposal for delivery to Congress by January 2011."

FHA Commissoner
David Stevens

I have been told over and over by Administration officials that there will be no big news announcement at the summit. No mandate that the government will suddenly infuse every troubled borrower's home with palatable equity.

Now I'm not saying something new couldn't happen, but as HUD and Treasury now launch the new principal writedown phase of the housing bailout, I'm just not sure it makes sense, politically or otherwise, to turn all that on its head.

Questions?  Comments?