Underwater Mortgage Reductions Likely

By Mike Colpitts

Federal officials are reviewing the possibility of starting mortgage principal reductions for underwater homeowners, according to the Boston Protest chief executive officer of Freddie Mac. The review was triggered by a U.S. Treasury Department offer that would triple payments to mortgage investors who allow the reductions through the Home Affordable Modification Program (HAMP).

A new analysis reported by investigative website ProPublica has found that loan forgiveness would not just allow at least hundreds of thousands of homeowners to keep their homes, but that it would also save tax payers billions of dollars in additional losses.

Tax payers have bailed out Freddie Mac and Fannie Mae at a cost that exceeds $150 billion as a result of the foreclosure crisis. The analysis, reported by ProPublica, which has been a leading source on the U.S. housing crisis, reported that the analysis was recently presented to the Federal Housing Finance Agency. The government agency regulates both federal mortgage giants.

The payouts range from 40 to 63 cents on the dollar investors agree to reduce, according to administration sources. The increased payouts make it more likely for underwater mortgage holders to obtain reductions. “I have to say recently the Treasury sweetened the program and tremendously increased incentive payments in their offer to us,” Freddie Mac CEO Ed Haldeman said at a mortgage symposium in Palm Beach, Florida.

Freddie Mac purchases mortgages from lenders it works with and then resells them as securities to investors. “If there are very large incentive payments, which could be 50% of what you could write down it may be in our economic self interest to participate in that,” said Haldeman.

Real estate research firm CorLogic estimates there are 11.1 million underwater mortgages in the U.S. and that about 3.3 million are held by Freddie Mac and Fannie Mae. The two government backed enterprises would have to be directed by the Federal Housing Finance Administration, which regulates the lenders to reduce mortgage principal.

The issue is a political hot potato since homeowners who are current on their mortgages could miss payments in order to possibly qualify for a program to receive a reduction in mortgage principal. Following reports by ProPublica last Friday lawmakers called on the FHFA to provide Congress with a new analysis on principal reductions by Fannie and Freddie.

A new analysis is likely to add an explosive new dimension to the politically charged debate, with members of Congress sharply divided over the proposal as they await the presidential election in November. The Illinois attorney general also urged the FHFA to immediately implement principal reductions on home mortgages held by Fannie and Freddie.