It's been a big week on the housing front. In addition to a truckload of housing data, there have been a number of stories about new programs aimed at helping homeowners, including:
- Reports Bank of America is testing a pilot program to convert homeowners at risk of foreclosure into renters.
- Speculation Fannie Mae and Freddie Mac might seek to sell foreclosed homes in bulk to hedge funds.
On Friday, ProPublica and NPR reported on what is perhaps, the biggest development yet: That Fannie and Freddie are now in favor of doing principal mortgage writedowns, which most experts agree are the most cost-effective way to deal with under water mortgages.
Despite the upfront hit, Fannie and Freddie conclude their losses are likely to be lower over the life of the loan with a principal reduction vs. a mortgage modification and certainly vs. an outright default.
"Their conclusion: Such loan forgiveness wouldn't just help keep hundreds of thousands of families in their homes, it would also save Freddie and Fannie money," write co-authors Jesse Eisinger and Chris Arnold. "That, in turn, would help taxpayers."
Wait...a housing plan that would not only help individual homeowners, it would also help taxpayers? Sounds to good to be true!
If something sounds too good to be true, it probably it is -- or, at least, won't get implemented.
According to Eisinger, a senior reporter at ProPublica, Fannie Mae and Freddie Mac's regulator will probably put the kibosh on principal reductions.
Fannie Mae and Freddie Mac are overseen by the Federal Housing Finance Agency (FHFA), whose acting director, Edward DeMacro opposes the concept.
"He is very concerned with moral hazard," Eisinger says of DeMacro. "It will cause a wave of people wanting this kind of stuff, strategically defaulting...not paying their mortgage so they would get a principal writedown. "
While agreeing this is a "valid concern," Eisinger argues the moral hazard threat can be mitigated by putting strict guidelines on who qualifies for a principal reduction, i.e. separating those who really can't make the payments vs. those who are choosing not to make them.
"Experts do say [a wave of strategic defaults] will be unlikely if you narrowly constrain the availability of this to people who are in real trouble," he says.
And there are a lot of people in real trouble: Zillow.com chief economist Stan Humphries estimates 11 to 14 million Americans are currently under water on a mortgage, with a cumulative negative equity of about $750 billion.
Nowhere near that many homeowners would be eligible if Fannie Mae and Freddie Mac pursue principal reductions. But the Obama Administration is offering all lenders new incentives for writedowns via the Home Affordable Modification Program (HAMP), plus money to fund it has already been allocated through TARP, Eisinger notes.
And speaking of TARP, the moral hazard horse left the barn a long time ago -- in case DeMarco hasn't noticed.
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