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