Principal Writedowns Happen, Just Not Through Government

A Wall Street Journal articleWednesday began, "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."


They may be in talks, but the talks clearly aren't going well.

When I asked the folks over at Fannie Mae to comment, they obliged quickly with, "We regularly review our policies regarding the modification of mortgages based on changing economic circumstances and our analysis of whether the effectiveness of the policies can be improved. We have been and will continue to work closely with FHFA on these matters."

I know.

The FHFA, the GSE's federal regulator charged with keeping the two mortgage giants afloat while still protecting taxpayers, responded with "No comment."

It's all about the FHA's "short refi" program, which offers lenders cash incentives to reduce balances on underwater loans (by at least 10 percent), if the borrowers are still current on their payments. In turn, the lender can then refinance to an FHA-insured loan.

So I called over to the FHA, where commissioner David Stevens had plenty to say, including that the GSE's were being "shortsighted." He used that word with several media outlets, I noticed. But he went on...

"What we believe they need to value seriously is that unlike other modification programs where there's potential high redefault risk, and they retain the asset, the value of being able to monetize the remaining asset and not retain future risk has significant value."

But the fact is, and I know it is barely a few months old, exactly three loans have made their way through the program to date. Fannie and Freddie hold the lions share of loans that would benefit from this, and the big servicers aren't going to jump in on their own without them.

Bank of America spokesman Dan Frahm says BofA is still considering the FHA program, but admits, "Our calculations of the program show the number of our customers that would benefit from the program would be very limited without the participation of Fannie Mae and Freddie Mac."

Bank of America already reduces principal in many of its proprietary modifications. Implementing the FHA program could result in "capacity strains of required technology and training programs" which Frahm says might not be justified by the benefits to so few eligible customers.

With so much resistance to the program, rumors began circulating that FHA might dump the program, but apparently without merit.

"No way," Commissioner Stevens told me this afternoon. "We are looking at what else could be done within reason to help make our programs work more effectively, but these are movements on the margin if anything."

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