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December 8th, 2010

Fannie, Freddie in talks to reduce underwater principal

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6-Fannie-Mae-logo The White House is beginning to apply additional pressure on Fannie Mae and Freddie Mac to reduce the principal balance of certain underwater homeowners. The underwater crisis, triggered by a massive falloff in home prices, has led to record-setting foreclosures and strategic defaults.

So far, Fannie and Freddie haven’t expressed any interest in participating in the latest wrinkle of the Treasury’s Making Home Affordable program, a principal-reduction initiative called the “Principal Reduction Alternative“:

With this new guidance, servicers are required to evaluate all HAMP-eligible loans with a mark-to-market loan-to-value (MTMLTV) greater than 115% to determine if a principal reduction is beneficial. If the evaluation shows the net present value (NPV) for a HAMP modification using PRA is positive, servicers are encouraged to offer the principal reduction to the borrower.

Unfortunately for underwater borrowers, for both private servicers and Fannie and Freddie alike, saving troubled loans isn’t as easy as just a simple principal reduction. Private servicers have their investors’ and their own bottom lines to think about. As we noted last month, for Fannie and Freddie, principal reductions are even more complicated and even more of a gray area:

What complicates the principal reduction issue for Fannie and Freddie, who have opted out of the Principal Reduction Alternative Option for the time being, is that they’re now operating with taxpayer dollars. Their lack of private funds to use means they must answer to taxpayers. It would mean that Fannie and Freddie would essentially be picking winners and losers — those who get a principal reduction and those who do not.

The FHA, who also has implemented a principal-reduction plan of their own (and just like the Treasury, need Fannie and Freddie’s participation in order for their program to have any real success), feel strongly that the industry’s overall avoidance of principal-reduction initiatives is “short-sighted”:

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.”

Nick Timiraos of the Wall Street Journal notes that this display of “arm twisting” is just the latest sign that the existing Making Home Affordable efforts aren’t coming close to helping the nation’s underwater borrowers.

It’s pretty evident that without Fannie and Freddie’s participation, both the FHA and the Treasury’s principal reduction initiatives will go nowhere.

HSH.com may have a solution

A few months back, HSH.com develop a plan of our own that could help the nation’s underwater borrowers refinance. Our plan isn’t as cut and dry as a simple principal reduction, and it’s different in the sense that it’s designed to help homeowners — who owe more on their mortgages than their homes are worth — take advantage of the historically-low mortgage rates we are experiencing.

Be sure to read more about our Value Gap Refinance plan. If you think our program could work, please contact your local lawmakers and make them aware of our idea.

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4 Responses to “Fannie, Freddie in talks to reduce underwater principal”

  1. Tweets that mention Fannie, Freddie in talks to reduce underwater principal | HSH Financial News Blog -- Topsy.com Says: December 8th, 2010 at 3:17 pm

    [...] This post was mentioned on Twitter by HSH Associates, Brett Robbins . Brett Robbins said: Fannie, Freddie in talks to reduce underwater principal: If the evaluation shows the net present value (NPV) for… http://bit.ly/eo06ij [...]

  2. Lockhart: Fannie and Freddie Over Time Should Move Over Into The Private Sector – CNBC | Baton Rouge Foreclosures Says: December 9th, 2010 at 10:15 am

    [...] Globe (blog)Under pressure Fannie, Freddie reluctant to cut loan amountsPasadena Star-NewsHSH Financial Publishers (blog) -MSN Money -America’s News Onlineall 88 news [...]

  3. Banks Suspend Foreclosures During The Holidays Once Again This Year – Examiner.com | Baton Rouge Foreclosures Says: December 9th, 2010 at 1:12 pm

    [...] Freddie reluctant to cut loan amountsPasadena Star-NewsBoston Globe (blog) -MSN Money -HSH Financial Publishers (blog)all 88 news [...]

  4. Pressure Mounts for Fannie and Freddie to Write Down Mortgages | Welcome to propertiesandnotes.com Says: December 21st, 2010 at 12:49 pm

    [...] Fannie, Freddie in talks to reduce underwater principal (hsh.com) [...]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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