Principal Reductions May Not Save Enough Underwater Homeowners
Posted on May 13th, 2013
Since the beginning of the mortgage meltdown millions of homeowners have defaulted on their loans and millions more remain underwater, owing more on their mortgages than their homes are worth. Government programs have encouraged lenders to modify home loans for struggling homeowners, yet only a small percentage have taken advantage of these programs.
Many lawmakers have been clamoring for a new tactic to be used by government-controlled mortgage financiers Fannie Mae and Freddie Mac, which guarantee about 90 percent of all new loans today. The Obama Administration as well as dozens of congressmen have asked Fannie and Freddie to grant principal forgiveness modifications, where a portion of the loan balance is written off, elimlinating borrowers’ negative equity and reducing their likelihood of defaulting. To date, the regulator of Fannie and Freddie has vetoed that option, worrying that it would cost the government too much money and would actually encourage homeowners to default in order to take advantage of the program.
A new study from the Congressional Budget Office (CBO) found that while principal reduction could help save some borrowers from foreclosure, the overall impact on the housing market would be minimal. Of the 10 million homeowners currently underwater on their loans, the CBO estimated that only 200,000 would be eligible for principal write-downs under the government’s Home Affordable Modification Program (HAMP.) The report found that fewer than 60,000 new modifications would in initiated and fewer than 100,000 defaults would be prevented. “The estimated aggregate financial benefit to households would be small,” the CBO wrote. “…[The] expected positive effects on the housing market nationally and on the economy as a whole would be small.”
This report, may make things complicated for North Carolina Representative Mel Watt, who was recently nominated by President Obama to be the next director of the Federal Housing Finance Agency, which oversees Fannie and Freddie. Watt was one of 44 House Democrats who commissioned the CBO study last fall, hoping it would prove the necessity of principal reductions.
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Can the FHA Avoid a Government Bailout?
Posted on December 7th, 2012
After revealing a $16.3 billion deficit in an audit released last month, the Federal Housing Administration is potentially facing a need for taxpayer aid in the coming months. Congress grilled U.S. Housing and Urban Development Secretary Shaun Donovan Thursday to find out what happened and how the FHA is going to fix its problems.
“We will continue, as we have throughout this Administration, to be diligent in taking every action appropriate to protect taxpayers while continuing to ensure that FHA supports the stabilization of the housing market,” Donovan said, according to his prepared remarks as quoted in the Washington Post and asserted that that the FHA “has acted as a vital stabilizing force when an economic crisis precipitated by the housing market could have resulted in this country’s second Great Depression. Our job now is to be good stewards of taxpayer dollars and ensure FHA can continue be a source of opportunity and access to homeownership for future generations.”
Much of the agency’s losses have stemmed from toxic loans the FHA backed between 2007 and 2009. In order to offset those failing parts of its portfolio, Donovan says the agency has plans to sell off 40,000 more of its distressed properties and will try to more successfully modify other loans by reducing payments by at least 20 percent for struggling borrowers. Additionally, the FHA will try to make short sales easier for buyers, in an effort to recoup some of the losses on foreclosed loans.
Donovan also told the Senate Banking Committee that the FHA is anticipating collecting $60 billion in fees for seriously delinquent loans claims by the end of 2014. It has also proposed increasing mortgage insurance premiums again for its borrowers to help cover all the costs.
And in his remarks before Congress, Donovan also stressed that whether or not the FHA will need a bailout is dependent on the Obama Administration budget, rather than on its own current deficit.
Filed under Federal Housing Administration, Mortgage, Mortgage News, foreclosure, home loan | No Comments »