Zandi: If Only the GSEs Adopted a Principal Reduction Program…

If the GSEs initiated a principal reduction program similar to the one outlined in the robo-signing settlement, roughly 650,000 borrowers could benefit, distressed sales would level off, and home values would “stabilize,” according to Moody’s Analytics chief economist Mark Zandi.

Testifying before the Senate Banking Committee this week, Zandi noted that widespread efforts to refinance underwater homeowners — and others locked out of the refi market — will reduce defaults and support an economic recovery through an infusion of cash.

“Facilitating well-targeted principal reduction loan modifications would be a much larger and costlier step, but would bring the housing downturn to a quicker and more definite end,” Zandi said.

The Obama Administration recently revised its Home Affordable Modification Program, allowing investors — including Fannie Mae and Freddie Mac – to receive higher incentive fees for reducing the principal amount of a mortgage as part of a loan modification.

To date, the Federal Housing Finance Agency has blocked the GSEs from engaging in principal reductions, claiming it would increase their losses, which are borne by taxpayers. 

The co-founder of Moody’s Analytics told the senators that a $20 billion principal reduction program would have enough scale to impact the housing market. More than 650,000 homeowners could benefit from an average $30,000 reduction in their loan balance.

The $25 billion settlement between the five large bank servicers and state attorneys generals designates $10 billion specifically for principal reduction and another $10 billion for other forms of mortgage relief – refinancing underwater borrowers, forgiveness of deficiencies after short sales, and principal forbearance for unemployed borrowers.

Zandi noted that the President proposed to pay for the HAMP principal reduction program with $20 billion in TARP funds slated for housing relief programs.

Meanwhile, pressure is growing on FHFA officials to give Fannie and Freddie the green light to participate in the HAMP principal reduction program.  Supposedly, FHFA acting director Edward DeMarco is still evaluating the agency’s opposition to principal reduction in light of higher incentive fees of up to 67 cents for every dollar reduced.

Article source: http://www.nationalmortgagenews.com/dailybriefing/2010_535/gses-principal-reduction-program-1028832-1.html

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