Call for GSEs to Apply Principal Reduction Continues
In a written speech to the National Council of State Housing Agencies on Monday, a Treasury official named a number of measures to address challenges in the housing market, and stressed one solution that has not been applied by Fannie Mae and Freddie Mac: principal reduction.
“We have also asked FHFA to allow the GSEs to participate in the principal reduction alternative of the Home Affordable Modification Program known as HAMP,” said Mary Miller, Under Secretary for Domestic Finance, in her written speech. “Given the large percentage of outstanding mortgages that are currently backed by Fannie or Freddie, it is important that the GSEs participate in this program.”
Calling principal reduction a useful tool, Miller said in “some targeted cases, principal reduction makes economic sense for both the homeowner and the lender – helping reduce investor losses and preventable foreclosures over the long term.”
Miller stated that this view not only belongs to the administration and government agencies, but also to those in the private sector.
Miller referenced a quarterly survey from the Office of the Comptroller of the Currency to further prove her point and stated the survey showed that of the mortgages held by private investors, nearly one in five that were modified also had reduced principal, and in the last six months, more than 40 percent of non-GSE mortgages modified through HAMP included principal reduction.
Recently, Edward DeMarco, FHFA Acting Director, has been under pressure to allow the GSEs to apply principal reduction in order to speed up recovery in the housing market and prevent underwater mortgages from going into foreclosure. Citing costs to taxpayers, DeMarco recently emphasized principal forbearance as a less costly form of relief.
To encourage the GSEs to apply principal reduction, the Treasury recently tripled incentives to between 18 and 63 cents for every dollar of principal reduced.
Other measures Miller mentioned to address the housing crises were the expanded HARP 2.0, a national program for GSEs to dispose of foreclosed properties, and hardship assistance such as the Hardest Hit Funds.