Government-backed mortgage financiers Fannie Mae and Freddie Mac have concluded they could save money through loan forgiveness to beleaguered homeowners, reducing the amount of principal they owe on their federally insured loans.
Analysis by the two lenders, which were rescued by the U.S. government in 2008 and have since cost taxpayers over $150 billion, shows that loan forgiveness would keep hundreds of thousands of Americans in their homes while also saving money in the long run, according to a joint report by NPR and ProPublica.
The report has not been made public but was recently presented to the agency that regulates Fannie and Freddie, the Federal Housing Finance Agency, two people familiar with the matter told the news outlets.
Principal reduction works, the report quotes Moody's Analytics chief economist Mark Zandi as saying.
If someone gets a reduction in their principal amount, it gives them a real powerful hook to really fight to try to hold onto the home, even if things aren't going financially right for them, he said.
According to Zandi, as many as 500,000 American homeowners whose mortgages were insured by Fannie and Freddie could see the amount they owe slashed under the proposal.
He told NPR and ProPublica, a nonprofit foundation for investigative reporting, that the plan would make a substantive difference to the housing market while boosting the U.S. economy.
The controversial idea was formulated after President Barack Obama's administration in February offered Fannie and Freddie fresh funding to help struggling homeowners refinance their mortgages based on interest rates. Obama also recently proposed an expansion of refinancing options for mortgage holders who are underwater, or paying more on their loans than their house's value.
But some experts have warned that a principal-reduction plan would anger the majority of U.S. homeowners left paying the full amount of their mortgages and trigger a wave of deliberate home-loan defaults as people rush to qualify for a reduction.
The principal reductions would also diminish revenue for Freddie and Fannie, resulting in more losses for taxpayers. According to NPR and ProPublica, the government would absorb up to half of the painful write-downs suffered by the lenders if the deal went ahead.
Despite support among some economists for loan forgiveness, the acting director of the FHFA, Edward DeMarco, hasn't signed off on the idea. DeMarco, whose agency effectively owns Fannie and Freddie, has previously denounced loan forgiveness, saying it would cost taxpayers too much money.
In February, DeMarco told the Senate banking committee: Both companies have been reviewing principal-forgiveness alternatives. Both have advised me that they do not believe it is in the best interest of the companies to do so.
Despite such opposition, many economists say the initiative would prevent costly defaults and ultimately save more taxpayer dollars from being poured into rescuing the two troubled lenders.
It saves taxpayers money and makes homeowners less likely to default, said Zandi.
I'm now perplexed why DeMarco is not more fully engaged.