The stance taken by the Federal Housing Finance Agency (FHFA) has been a hard one against debt-forgiveness. The agency claims that other types of loan-modification cost mortgage giants Fannie Mac and Freddie Mac less.
However, with the Treasury Department’s offer to foot part of the bill for any program to forgive debt, the math indicates that the two firms could save over $1.5 billion more than approaches currently employed to mitigate loss.
The director of the FHFA maintains that principal write-downs could do more harm than good for the firms if the program encourages a significant portion of homeowners to default with the hopes of getting more favorable treatment.
The agency director has come under fire from critics who believe that the taxpayers supported companies should do more to bolster housing markets. His position is tough: he must attempt to limit losses at both firms while promoting efforts to modify mortgages for struggling borrowers.
The debate, essentially centers on two issues: (1) Aggressive modifications that are expensive but can potentially expedite a housing recovery while saving the firms money over time. (2) Forgiving debt, which could move some borrowers to default to receive help.
The director has, until now, maintained that principal-forbearance wherein Fannie and Freddie only require payments on most of the balance is less costly than debt forgiveness. But, at the year’s start the Treasury Department extended subsidies from the Troubled Asset Relief Program to Fannie and Freddie for principal – forgiveness.
The agency’s analysis showed an almost $2 billion difference in savings between principal forbearance and reduction, in favor of reduction.