Trade associations are up in arms over Federal Housing Finance Agency Director Edward DeMarco’s comments Tuesday at the Brookings Institute that the FHFA may consider principal forgiveness for certain underwater borrowers whose loans are owned or guaranteed by Fannie Mae or Freddie Mac.
In a letter to FHFA, NAFCU President/CEO Fred Becker agreed with DeMarco when he said a key risk in principal forgiveness is the incentive for borrowers to cease paying in search of a principal forgiveness modification.
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“Strategically defaulting on loans is a problem in the housing market and continues to cause credit unions great difficulties,” Becker said in the letter. “We are gravely concerned that incorporating principal forgiveness modification as part of borrower-assistance programs would create an incentive for at least some borrowers to strategically default, causing credit unions and their members significant losses that they will not be able to recoup.”
Becker added a pitch for proposed legislation that aims to give credit unions access to secondary capital, saying “credit unions would be more acutely affected by such losses because of their inability to tap into markets to raise capital in order to support revenue-generating programs that would offset the losses.”
CUNA General Counsel Eric Richard cautioned Credit Union Times that very few details about the plan have been released, and it has not been adopted by FHFA at this point.
“Any plan to reduce principal must be undertaken with great care to avoid giving an incentive to more homeowners to stop paying their mortgages,” he said.
The plan is apparently based on further subsidies to Fannie and Freddie to cover any principal reductions, he added, and other lenders, such as credit unions, who will not be getting such subsidies should not be expected to follow suit.
American Bankers Association President/CEO Frank Keating said in a statement that there are more cost-effective and efficient options for borrowers and American taxpayers than principal reduction.
“In most instances, principal reductions through Fannie Mae and Freddie Mac are not a feasible solution because they increase – rather than limit – taxpayers’ liability, raise the cost of credit and create improper incentives for borrowers,” Keating said.
Principal reduction would create an incentive for “a huge group of borrowers” to stop making payments on their mortgages in hopes of principal forgiveness, he said. And, such a program would result in fewer investors willing to lend for housing finance, increased borrowing costs and tighter credit availability.