HUD’s Donovan: Fannie, Freddie Should Embrace Loan Forgiveness

By Nick Timiraos  for WSJ.com February 16, 2012, 4:27 PM

The Obama administration would like the federal regulator for Fannie Mae and Freddie Mac to begin reducing loan balances for certain troubled borrowers, a top official said Thursday.

“More and more economists across the political spectrum are recognizing [principal reduction] is a critical step,” said Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, in an interview with The Wall Street Journal. “If a family is in their home for 10, 15 years and has no hope of being able to build equity again, they’re going to give up at some point.”

Officials have said for more than a year that they’d like to see mortgage giants Fannie and Freddie adopt principal reduction, and several steps in recent weeks have put more pressure on the Federal Housing Finance Agency, the firms’ regulator, to approve write downs.

“Clearly it’s an important piece of the puzzle that Fannie and Freddie move forward on this,” said Mr. Donovan. Last month, the White House said it would triple incentive payments under an existing loan-modification program that subsidizes the cost of loan forgiveness and that it would offer them to Fannie and Freddie.

When the principal reduction program was rolled out two years ago, those incentive payments weren’t extended to Fannie and Freddie, and their regulator has said there are less costly ways to help borrowers avoid foreclosure. The firms are being propped up with massive taxpayer infusions of their own, and the FHFA is tasked with preserving the firms’ assets.

By providing new taxpayer funds, the administration is making it harder for the FHFA to maintain its stance that principal reduction is less costly because Treasury funds will effectively subsidize some of those losses. The FHFA has said it is currently evaluating the newest proposal.

The firms are “working right now…to make a decision on whether they are going to begin principal reduction,” said Mr. Donovan. “We certainly hope that they will start to do that based on these incentives. That’s why we made them available.”

Separately, Mr. Donovan said he remained “concerned” about the prospect of taxpayers being forced to backstop losses at the Federal Housing Administration. Budget projections this week showed that the agency could deplete its reserves this year. The FHA, which doesn’t make loans but instead insures lenders, has played a critical role supporting housing markets amid a sharp pullback by the rest of the market.

The agency could announce within days its plan to increase the premiums charged to borrowers in order to build up its reserves. HUD also announced in recent days settlements with two of its biggest lenders over fraudulent loan claims that will net more than $680 million for the agency.

But Mr. Donovan warned of precipitous actions to boost reserves that limit the availability of credit and undermine fragile housing markets. “This is a delicate balancing act because if we go too far…what we’re going to be doing is stalling the momentum that we have in the housing recovery,” he said. “Frankly, that not only hurts homeowners more broadly in the housing market, it hurts FHA because the value of our existing investments goes down.”

• Fannie Mae,
• Freddie Mac,
• Obama administration

Original Post: http://blogs.wsj.com/developments/2012/02/16/huds-donovan-fannie-freddie-should-embrace-loan-forgiveness/

What The Mortgage Relief Plan Would Do For Homeowners

 

by Deborah L. Jacobs, Forbes Staff  for Forbes.com

After more than a year of wrangling over various mortgage relief proposals, influential state leaders seem close to adopting a plan that Pres. Obama announced Feb. 1. Attorney General Eric T. Schneiderman of New York and California’s attorney general, Kamala Harris have indicated they are closer to agreement than in the past.

There are two important elements of the plan and details of both have been a subject of fierce disagreement. One, which could be worth about $25 billion, relates to how much money would be allocated to benefit homeowners and the specific relief they would receive. The other involves the power states would have to investigate past practices by banks, oversee future ones and monitor compliance with the plan.

If the plan is adopted, here’s what it would do for homeowners in specific situations.

Mortgage underwater but current with payments. More than 10 million homeowners in the U.S., due to a decline in home prices, owe more on their mortgages than their houses are worth. So even though interest rates have declined, they have been unable to refinance. The latest plan would enable people who have been making loan payments on time to save about $3,000 a year on their mortgage by refinancing with lower-interest loans guaranteed by the Federal Housing Administration.

Mortgage underwater and behind with payments. Depending on how many states sign on to the plan, up to $17 billion would be set aside to reduce principal for homeowners who are behind on their payments and owe more than their houses are currently worth. The plan would not guarantee a minimum amount of mortgage relief by state.

Victims of foreclosure fraud. The plan would provide payments of about $1,800 apiece to approximately 750,000 families that have been the victim of an improper foreclosure practice. Since 2010, federal authorities have been investigating banks’ routine electronic notarization of documents being transferred from one financial institution to another as part of the foreclosure process–a practice known as robo-signing.

Compensation is likely to be offered to people who lost their homes between Jan. 1, 2008, and Dec. 31, 2011. They would not be required to give up their right to sue the financial institutions. Banks, among them the five biggest mortgage providers–Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial—want to be relieved of liability for future claims involving robo-signing.

In announcing the plan on Feb. 1, the President said he was “working to turn more foreclosed homes into rental housing.” So far such a plan is not contained in the pending proposal.

Deborah L. Jacobs, a lawyer and journalist, is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide. You can follow her articles on Forbes by clicking the red plus sign or the blue Facebook “subscribe” button to the right of her picture above any post. She is also on Twitter.

Original Post: http://www.forbes.com/sites/deborahljacobs/2012/02/06/what-the-mortgage-relief-plan-would-do-for-homeowners/