According to a new report from the Congressional Budget Office (CBO), Fannie Mae and Freddie Mac are responsible for “nearly 13 percent” of underwater borrowers in the country. This does not mean that they caused the underwater situation, but that they hold the loans that are presently in negative equity. The CBO report directly addresses controversial suggestions that Fannie and Freddie modify loans by reducing principal, something that acting Federal Housing Finance Agency (FHFA) director Edward DeMarco has steadfastly refused to entertain. According to the CBO report, reducing principal on underwater GSE loans via the Home Affordable Modification Program (HAMP) would not only result in “small savings to the government” and “slightly reduce mortgage foreclosures and delinquency rates,” but it would also “slightly boost overall economic growth”[1]. The report also suggests offering principal forgiveness only to borrowers who are already behind on payments when the principal forgiveness program goes into effect, thereby eliminating strategic defaulters who might stop paying their mortgages later in order to get a better rate[2].

The CBO estimates that about 610,000 borrowers qualify for HAMP assistance at this point in time, but also suggests modifications to the program to bring in an additional 550,000 borrowers. The report also suggests that principal forgiveness might be balanced out by borrowers agreeing to grant the lender the right to future increases in home value. The CBO report provided some congressional representatives for grounds for some strong words for the GSEs’ slow implementation of the HAMP program, saying that “rather than implement these programs years ago when their benefits were obvious, ideologues ignored…evidence and harmed our nation as a result.”

Do you think that principal forgiveness is a good idea for the taxpayer-funded GSEs?

Your comments and questions are welcomed below.

 


[1] http://nationalmortgageprofessional.com/news37161/cbo-report-finds-gses-responsible-13-percent-underwater-borrowers

[2] http://thehill.com/blogs/on-the-money/1091-housing/297259-cbo-report-principal-reductions-could-save-billions

by Carole VanSickle