Should the GSEs offer principal write-downs?

Source: HousingWire

Talk of Fannie Mae and Freddie Mac offering principal write-downs — something they have so far refused to do — hit the airwaves in a big way.

Big names like HUD Secretary Shaun Donovan and California Attorney General Kamala Harris put the pressure on the acting director of the FHFA, Edward DeMarco, to make this an option. DeMarco has emphatically refused.

The idea of writing down mortgages used to be completely unheard of. But in the age of the housing crisis, anything is a go. Banks are using it, so why aren’t Fannie and Freddie? Here are a few pros and cons. Chime in on what you think the mortgage giants should do.

Pro:

■Other kinds of loan modifications may not be as effective, especially if homeowners are deep underwater. Principal forbearance, for instance, still requires homeowners to eventually pay the mortgage on a home that’s worth much less than the money they’ll eventually spend on it. This may not be enough incentive for homeowners to keep making payments, even if they are smaller.
■Foreclosure affects more than just the homeowner. When a home is foreclosed, prices of surrounding properties are driven down. If principal write-downs are the only way to stop a foreclosure, the benefit to neighbors should be considered.
■Banks are using it, so why can’t Fannie and Freddie? Lenders decided there is benefit to recouping some of the money if the alternative is foreclosure. It seems that taxpayers would benefit if the government-sponsored enterprises used principal write-downs as a last resort.


Cons:

■DeMarco is right. Principal write-downs lose taxpayers money. Loan modifications reduce the monthly payment for homeowners, but unlike write-downs the homeowner still owes the full cost of the loan. They lessen the monthly burden without taking taxpayer money.
■There is the moral hazard associated with principal write-downs. If the mortgage giants, who hold about 60% of all home loans, make this policy there is a good chance people will begin to default on their loans just to qualify. Who wouldn’t want to get out of $50,000 in debt? This risk may outweigh the reward of fewer foreclosures.
■It may not be Fannie and Freddie’s call. According to DeMarco, they are not allowed to write-down the loans without explicit permission from Congress. At a recent event held by the National Journal, DeMarco said, “If there's a larger macroeconomic or public policy purpose to serve by using taxpayer resources to provide debt forgiveness for certain homeowners, that's the judgment of elected officials."

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