Tuesday, January 24, 2012
Fannie & Freddie Would Need Another $100 Billion From Taxpayers For Obama’s Proposed Mortgage Writedown
The regulator for Fannie Mae and Freddie Mac told lawmakers that forcing the two mortgage firms to write down loan principal would require more than $100 billion in fresh taxpayer funds.
In a letter sent on Friday to the Republican and Democratic leaders of a House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth.
It said it had determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default.
“Principal reduction never serves the long-term interest of the taxpayer when compared to foreclosure,” FHFA’s acting director, Edward DeMarco, wrote in the letter to lawmakers dated January 20.
About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic.
“Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action,” DeMarco said in the letter.
Another barrier to principal writedowns, aside from pushing losses at the two firms even further, DeMarco said, was the costs associated with new technology and training to servicers that would be needed to launch a program that offers principal forgiveness.
The Federal Reserve, in a white paper to Congress earlier this month, said write-downs “had the potential to decrease the probability of default” and “improve migration between labor markets.”
However, the Fed stopped short of endorsing such an initiative and noted concern that writing down loan balances would create a moral hazard — the concept that rescue efforts breed further behavior that exacerbates the existing problem — and could prompt other borrowers to stop making timely loan payments.
Calculating the Maximum Cost
At least we know an approximate maximum cap. Negative equity totals $750 billion. Add in cost on implementing the program, graft, fraud, etc. and the cap (right now) is a conservative $760 billion or so. Factor in declining property values and a conservative cap is $800 billion or so.
Obama Seeks Vote-Buying Opportunity
Notice the ridiculous comment by the Fed: write-downs “had the potential to decrease the probability of default“. Of course they do.
Write off the entire loan and there would be no chance of default. That does not mean it’s a smart thing to do. Unless of course you are President Obama seeking to buy votes in November.
Greg Fielding of the Bay Area Real Estate Trends blog writes …
What’s interesting in the letter is that they promote principal reduction as costing $100 billion, but the “potential” savings of mods and forbearance is only a few percent. And the data they use has no assumptions for an increase in the overall number of foreclosures as negative equity grows. This whole thing smells of incompetence and corruption.
Mish says … Exactly!
Not to mention vote buying and I am quite sure back-door bailouts of banks as well (who will be permitted to sell “assets” to Fannie and Freddie in advance).