DeMarco: Strategic Defaults Could Quickly Wipe Out Principal Forgiveness Gains
If only 90,000 deeply underwater but current borrowers defaulted on their Fannie Mae and Freddie Mac-owned mortgages in an attempt to qualify for a principal forgiveness program, the financial benefits of the program would be eliminated. So said Federal Housing Financial Agency Director Edward DeMarco Tuesday during a controversial speech at the Brookings Institution that has set off a firestorm of controversy among lenders.
Ninety thousand pales in comparison to the approximately 2 million borrowers that could be eligible for a principal forgiveness modification from Fannie and Freddie, according to the speech, available on FHFA’s website.
DeMarco explained that the Enterprises could save $1.7 billion by forgiving an average of $51,000 off the balances of borrowers that are currently 60 days delinquent, which represent approximately 5% of all Fannie and Freddie-owned mortgages outstanding. Losses on those loans are expected to be $63.7 billion with no modification, $55.5 billion with principal forbearance modifications, and $53.7 billion with principal forgiveness.
However, that $1.7 billion savings requires $3.8 billion in incentive payments from the Treasury. Overall, principal forgiveness would cost taxpayers net $2.1 billion; however, such a program could benefit Americans in the form of greater housing marketing stability if it reduces the total number of foreclosures. However, that benefit is difficult to quantify, DeMarco said.
Additionally, principal forgiveness is “not about some huge difference-making program that will rescue the housing market,” the FHFA director said, noting that 11 million homeowners are currently underwater.
“It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers,” he said.