The reason foreclosures will continue

 By Paul McMorrow

Thanks to the Boston Globe

A year ago, 49 states and the federal government brought five of the country’s biggest banks to heel. They crafted a nationwide foreclosure settlement that ended a series of abuses, and committed the banks to keeping struggling homeowners off the streets. The settlement is working. But as it takes hold, it’s exposing a huge rift in the housing market. The government’s own mortgage arms, Fannie Mae and Freddie Mac, still won’t meet the same standards the big banks have committed to, and until they do, foreclosures will continue to drag on.

Prior to last year’s settlement, the nation’s biggest banks greeted the foreclosure crisis with indifference. They paid lip service to the notion of helping troubled homeowners, but let homeowner assistance languish while they rushed foreclosures through the system. They signed legal papers they hadn’t read, and they seized homes they didn’t legally own. They treated their own rights as lenders as sacrosanct, but trampled on consumers.

For all this, the banks paid dearly. Last February, Bank of America, Citigroup, JP Morgan, Wells Fargo, and GMAC agreed to the largest consumer financial protection settlement in US history. The $25 billion national mortgage settlement allowed for some cash payments to states and foreclosed homeowners. Banks reserved the bulk of the settlement’s billions, however, for homeowners still struggling with the housing bust.

The banks’ cash penalty funded a foreclosure prevention effort in Attorney General Martha Coakley’s office that has assisted 4,600 borrowers and stopped 427 foreclosure auctions. In addition, a November report by the national settlement monitor showed the five big banks completing 4,000 foreclosure relief cases in Massachusetts, with another 2,100 in their pipelines. The five banks have written down 2,000 homeowners’ outstanding principal balances by a total of $125 million. They’ve written off $2.5 billion in principal nationally.

Last year’s nationwide settlement got the country’s biggest banks to accept an argument housing advocates had been making for years — that the banks’ interests in minimizing their foreclosure losses and struggling borrowers’ interests in remaining in their homes were often aligned. Foreclosures often cost banks more money than loan modifications, and loan modifications don’t create homeless families or broken neighborhoods.

The settlement forced banks to atone for years of conducting improper foreclosures by working to keep current borrowers in their homes, but Bank of America, Citigroup, JP Morgan, Wells Fargo, and GMAC can only reach so far. Roughly half of the housing market falls in the hands of Fannie Mae and Freddie Mac, the bailed-out, federally owned mortgage giants. The state and federal foreclosure settlement imposed an aggressive set of rules on the country’s biggest banks, but Fannie and Freddie have set up an entirely different set of rules for themselves.

Banks avoid foreclosures and keep troubled homeowners in their homes by knocking down borrowers’ monthly mortgage payments. They can do this by rolling loans into lower interest rates, or by adding years to a mortgage’s life. The most direct way, though, is to chop the amount owed on a loan down to market value. Reducing mortgage principal acknowledges market realities and stabilizes hard-hit neighborhoods, since foreclosures have been concentrated in areas that have suffered the steepest home price declines. It’s also good business. All things being equal, borrowers who see their principal reduced are less likely to re-default on their loans than are borrowers who just get lower interest rates or longer-lived mortgages.

Principal write-downs work, but Fannie and Freddie have dodged them because they’re politically poisonous. So even as one branch of the government has forced the country’s biggest banks to use principal reduction as a tool for keeping homeowners out of foreclosure, the two mortgage companies that taxpayers own, Fannie and Freddie, won’t join in. The companies would rather foreclose than write down principal for troubled borrowers. They’re refusing to sell foreclosed homes to nonprofits that sell foreclosed homes back to their former owners — a post-foreclosure tool for reducing principal — even in the face of a Massachusetts law banning such restrictions.

These are decisions grounded in fearful politics, not policy. But their impact is widespread. Fannie and Freddie hold over 2,600 foreclosed homes. They’re wrestling with another 19,000 seriously delinquent mortgages. Every one of those loans represents a family in need. Not all have the income to repay even a modified home loan. The ones that do, however, deserve the strongest possible shots at holding on to their homes. That means having the government’s own mortgage companies meet the same standards the government extracted from Wall Street.

Thanks to the Boston Globe

Fannie, Freddie chief’s rejection of mortgage reductions has bankers smiling

Thanks to the MBJ Business Blog

Fannie Mae and Freddie Mac won’t be taking part in the Obama administration’s home mortgage principal reduction program.

That’s bad news for underwater homeowners but cause for rounds of high-fives among executives in the nation’s financial sector.

The setback for homeowners came Tuesday when Federal Housing Finance Agency Acting Director Ed DeMarco bowed to pressure from Wall Street and rejected pleas from the Obama administration to

allow Fannie Mae and Freddie Mac to take part in the principal reduction program.

DeMarco instead opted to go ahead with principal forbearance and other loan modification programs.

Here’s his statement:

“Today, I provided a response to numerous congressional inquiries as to whether the Federal Housing Finance Agency (FHFA) would direct Fannie Mae and Freddie Mac to implement the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA). After extensive analysis of the revised HAMP PRA, including the determination by the Treasury Department to begin using Troubled Asset Relief Program (TARP) monies to make incentive payments to Fannie Mae and Freddie Mac, FHFA has concluded that the anticipated benefits do not outweigh the costs and risks.

“Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.

 

“I have also previewed for Congress several housing-related initiatives to strengthen the loss mitigation and borrower assistance efforts of Fannie Mae and Freddie Mac as well as improve the operation of the housing finance market. These initiatives include new and consistent policies for lender representations and warranties, alignment and simplification of the Enterprise short sales programs, and further enhancements for borrowers looking to refinance their mortgages.”

 

Supporters of the administration write-down plan say the analysis showed pretty clearly that Fannie and Freddie would benefit financially from the program, because of the reduction in the likelihood of defaults after principal reductions.

For one, they say, homeowners would benefit in by saving their homes.

And, alas, TARP money would go toward its intended purpose rather than a remaining bag of money for bailing out banks and funding sky-high CEO salaries.

DeMarco’s critics are also wondering how it is that DeMarco became the guardian of TARP funds.

Count Tim Geithner among them. The Treasury secretary fired off an angry letter to DeMarco Tuesday, asking him to reconsider on barring principal reductions.

DeMarco used “selective numbers” in the FHFA analysis, Geithner charged.

While DeMarco spread gloom among homeowners and White House officials, he brought cheer to the financial sector. “We appreciate FHFA’s prudent and thoughtful approach that considered the full costs and benefits of principal reductions,” said Bob Davis, American Bankers Association executive VP of mortgage policy.

Davis insisted troubled borrowers can be helped and recovery in the housing market encouraged without principal reductions that only “increase the cost to taxpayers at a time when our nation’s fiscal situation is already strained.”

Davis further theorized that mortgage borrowers could be welchers trying to avoid meeting mortgage commitments. “Our nation’s housing policy should first and foremost promote responsible, sustained homeownership, not incentivize borrowers to default on mortgages they are able to afford in search of taxpayer-funded assistance,” the banking association executive said.

In praising DeMarco, Davis said the industry can fix the troubled home mortgage market by “further streamlining the refinance process” and continuing efforts “to expand refinancing to additional borrowers.”

David H. Stevens, president & CEO of the Mortgage Bankers Association, also gave a statement of support for DeMarco’s decision. But his remarks came without the accusatory tone expressed by the ABA’s Davis.

In short, Stevens said, the long term national costs of a widespread principal reduction program “are unlikely to outweigh what may be a short-term gain for a few select borrowers in certain states.”

Thanks to the MBJ Business Blog