Debt forgiveness for underwater homeowners is being deliberated by the Federal Housing Finance Agency (FHFA) – to the surprise of those familiar with the agency’s disposition against principal reduction arrangements.
A group in the House of Representatives – which includes legislative representation from the state of California – presented the proposal to the FHFA in a meeting convened to discuss foreclosure relief for distressed homeowners. The FHFA has reported its legal team is reviewing the debt reduction proposal further and will provide an assessment within two weeks.
The FHFA regulates the two government-sponsored enterprises Freddie Mac and Fannie Mae. The two institutions collectively back 70% of the nation’s home mortgage loans. Without FHFA authorization of principal reduction, none of these loans may qualify for debt forgiveness programs.
first tuesday take: A nod to the aggressive members of the House of Representatives panel for pushing the cramdown platform with the FHFA. Congress can’t agree on cramdowns, but maybe government agencies will see the daylight of a positive equity for California’s homeowners.
For negative equity homeowners (2.5 million of them in California), principal reduction is their final saving grace for a number of reasons:
- their loan-to-value (LTV) ratios run mostly over 125%;
- efforts to obtain a loan modification with a lender have failed; and
- their monthly income has taken a blow due to underemployment or unemployment. [For more information on the arguments against principal reduction, see the November 2011 first tuesday article, Surprise: Frannie says no thank you to cramdowns.]
The FHFA’s consideration of the cramdown proposal is promising, but don’t give them a high-five just yet. A nudge is more appropriate to loosen their hard line against principal reduction. However, that isn’t to say a change of heart isn’t possible. But we’ll keep our eye on them for the next two weeks. Don’t let the suspense kill you.
RE: “Federal Housing Finance Agency Considering Proposal to Forgive Mortgage Debt” from the Huffington Post
i have to disagree with those here blaming govt. for this steaming pile. Fannie and Freddie, and the FHA have a respectable history of making loans based on underwriting. the problem arose when the wall street money managers from all the second tier B schools decided they needed mortgages to securitize and carve into ‘financial products’ for resale to all corners of the earth. they backed up the trainloads of cash and told the loan originators at Countrywide and Ameriquest and New Century and so on to just make loans and the liars loan was born. we went from a primarily underwritten loan marketplace to one of pure fabrication as many hundreds of thousands of folks who couldn’t previously buy lunch without a co-signer were now “buyers”. the flood gates opened and the rest is history. those of us in the business watched as loan officers at the banks got their hat shirt and ass handed to them as the mortgage bankers were able to fund loans that the banks were not…loans to people that LIED about their income. with no underwriting going on this was an easy task. add to that the 100% financing schemes and the rise of the pick a payment options and the perfect storm was cued up.
trillions of dollars of loans to people with no skin on the game…gee, how could that end poorly? unfortunately the massive demand created by the new “Liar Buyers” also forced up the general price level as the sales were presumed to be legit and fannie and freddie did make loans to folks to buy overpriced sheds…and many of those folks did make down payments which are now evaporated. while many of these folks used the pretend profits from prior sales, some used savings from earnings and lost that saved wealth when the bubble burst. i am not whining for them…that;s what happens when the market craps on you. i am not willing to backstop anyones losses.
so don’t get me wrong…the government is no friend and they could screw up a trainwreck…i just can’t tag DC with this problem…I LAY IT SQUARELY AT THE DOORSTEP OF THE HACKS IN THE BOWELS OF WALL STREET THAT CREATED THE ‘INVESTMENT’ PRODUCTS THAT WERE BASED ON MORTGAGES THAT WERE COMPLETELY NON-UNDERWRITTEN.
Link provides historical references to lessons learned from 1990’s housing crisis. Copy link to address bar.
http://www.fdic.gov/bank/historical/managing/contents.pdf
During the Saving and Loan Crisis 1990’s the Resolution Trust Corp. (RTC) was created and is now part of Federal Deposit Insurance Corporation (FDIC), The RTC had developed a blueprint for handling thousands of distressed properties dumped on the market. We should have learned something from the 1990’s SnL crisis and observed the RTC guidelines or modified them to bring them up to date, rather than re-envent the wheel.
Kurt, very well said! With very few exceptions, when our government/polititions say they are here to help you, don’t walk… run!
The mortgage crisis was government driven from the start and many years in the making. FDR helped to create Federal National Mortgage Association (Fannie Mae) as part of the New Deal and Richard Nixon chartered the Federal Home Loan Mortgage Corporation (Freddie Mac) in 1970. Then the Community Reinvestment Act was passed in 1977 to prevent “redlining” by banks of low income neighborhoods.
The Clinton Administration instructed Fannie and Freddie to increase the number of risky mortgages in their portfolio from poor and minority communities. HUD Secretary Cuomo helped to facilitate a mandate to fund poor families with down payments and low interest mortgages, which amounted to “affirmative action” lending. Also, community activist groups like ACORN harassed banks and bank executives as well as threatened action under the CRA if the banks didn’t make more money available to poor neighborhoods.
Then starting in 2000 various members of Congress and other outside groups called for stricter regulations on Fannie and Freddie, but many other members of Congress, predominately Barney Frank, Chris Dodd, etc. said there was no problem and threatened to block any stricter regulation of the two GSE’s (Government Sponsored Entities).
From an interview with Barney Frank, the Boston Globe reported the following:
“Frank, in his most detailed explanation to date about his actions, said in an interview he missed the warning signs because he was wearing ideological blinders. He said he had worried that Republican lawmakers and the Bush administration were going after Fannie and Freddie for their own ideological reasons and would curtail the lenders’ mission of providing affordable housing.”
Fannie and Freddie were exempted from Sarbanes Oxley reporting rules. The Democrats also threatened to filibuster any legislation designed to place stricter regulations on Fannie and Freddie in the Senate. When it was clear executives at Fannie and Freddie were guilty of accounting fraud to the tune of $200 million, no one went to jail. A number of the executives like Franklin Raines and Jamie Gorelick were former Clinton Administration officials and James Johnson was a Democratic Party Operative, so that had friends in high places who protected them.
continued….
By the way, cram downs means that banks will be forced to take a loss. Do you seriously think that such action will encourage or discourage banks to continue to lend in the real estate market?
Banks are like investors. They are not in business to subsidize people. They are in the business of making a profit. Would you knowingly invest in a bank stock with your hard earned money, if that bank was being forced to subsidize people??? I assume you expect a return on your money, why shouldn’t a bank?
The Mortgage Crisis was created by Government pure and simple. To say that Wall Street caused the problem is completely clueless and is like saying the tail wags the dog.
Fannie and Freddie funneled all those mortgage to Wall Street in the first place. Investment Banks do not give out mortgage loans. To say they are responsible for what Fannie and Freddie bought up from mortgage lenders and then sent to Wall Street to be securitized is absurd.
(See: The Various Types of CMOs
http://www.investinginbonds.com/learnmore.asp?catid=11&subcatid=58&id=35)
Tell me how a Wall Street Bank knows what is in a mortgage pool with potentially thousands of mortgages?? Do you think they even have all the documents to read through them and understand what is in that mortgage pool, much less the legal and real estate background to understand lending and real estate laws in all 50 states????
CF, the government has created a rock and a hard place situation. The government should have never interfered with good lending practices in the first place. Remember back in the old days when home buyers had to actually make a down payment to purchase a home… AND had to prove they had the income to make the payments? To add insult to injury, the lender had to verify their income AND the borrowers assets!
Enters Dodd, Frank and Schummer with the “let everyone own a home act” and literally forced banks and home mortgage companies to create a “sub-prime” loan product to comply with the fantasies of the elite and we see the results today. Now the same team who, in my opinion, started the snowball rolling, Dodd/Frank, have come up with the fix… now there’s irony for you!
We’re holding hands on the greed thing, to which I would add a political power grab. I just wish the government would stay the hell out of our face and let the free market seek it’s own level. No business is to big to fail… banks, auto companies or candy stores all businesses and if they follow good business practices, they will stay in business, if not… they will fail!
David is referring to the archaic laws that allow our banking system to put products on the market that are meant to fail, the banks want to fail, so when they do we the taxpayer is on the hook to pay the tab to the bank. The banks are cleaning up in the record profit area as they get paid to foreclose, paid when it sells, paid when a new loan is in place. There bank is no incentive to work with homeowners, no incentive to care about what it is doing to the economy because they are too big to fail and write the rules, and will make money foreclosing and then reselling the same property.
If the banks were forced to modify all loans 2 years ago us taxpayers would have saved a whole lot of money as it would have still been in the equity in the homes owned by homeowners. Right now it does not matter if the market values slip another 30% because we the taxpayers will make up the difference for the bank so why not let the people have their homes!
Joe, you have to stop believing the misinformation that is being feed to you via the banks about this was all caused by irresponsible homeowners. This problem started with and will end when the greedy banks who masterminded this all on the backs of innocent homeowners are held accountable.
This problem should stay where it belong, with the lenders, wall street who promoted the sale of over state loan packages and the home owners who took out the loans that they could not handle. It came down to greed for each one that thought they would make a profit. The Real Estate Sales Companies also share in promoting over inflated properties and under qualified buyers. All of these should share the problem not developing a socialized program, let free enterprise alone.
Exactly… Let’s have the same people that created the problem, in the first place, come to the rescue! That should work out well!
Which archaic credit laws are you referring to that need the change… the ones requiring lenders to make loans to people with no verification of ability to pay, or the laws that require that if you take out a loan, you must repay it? I’m so confused!
The real problem in this housing crisis and the discussions of negative equity, is that the vast majority of these millions of home owners are delinquent in the payment of their home loans and their credit rating has been ruined and will stay that way for several years. If there is no governmental relief, millions of the individuals will lose their homes, and they do not have the credit rating to qualify to rent an apartment or another home. In fact, a good credit rating is now necessary to obtain a new job or buy a car. In reality, we will have millions of families that will be homeless and have no options for housing, no options for obtaining a new job and won’t qualify for an auto loan so that they have transportation to get to work.
It is time to review and change our archaic credit laws, which will be necessary for a true economic recovery..