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By Rachel Kurzius

Will New HAMP Incentives Get Fannie and Freddie to Allow Principal Reductions?

January 30, 2012

The Obama administration’s latest attempt to buoy underwater and otherwise struggling homeowners includes additional incentives to banks, Fannie Mae and Freddie Mac to allow principal reductions and an easing of the restrictions for entrance into its signature federal loan-modification program.

The Treasury-announced expansion of the Home Affordable Modification Program on Friday will, most notably, triple the incentives provided to investors who agreed to principal reduction on loans, including incentives geared towards the GSEs to allow for principal reduction on loans they own or insure.

Treasury will pay from 18 to 63 cents on the dollar for investors who agree to reduce borrowers’ principal, with the precise amount depending on how much the loan-to-value ratio changes thanks to the reduction. Previously, the maximum was 21 cents on the dollar.

 The Treasury’s new offer of a carrot to government-sponsored enterprises Fannie Mae and Freddie Mac comes less than a week after their watchdog, the Federal Housing Finance Agency, released a long-awaited analysis of why the GSEs would not engage in principal reductions for loans they insure or hold.

In sum, the agency believed principal reductions would cost taxpayers $100 billion dollars, not including the price of updating technology and infrastructure to implement the process. Without hard data to demonstrate the efficacy of principal reduction, the FHFA determined it was not the best course of action.

The Treasury’s announcement seeks to change that stance, noting that its incentive scheme is designed “to encourage the GSEs to offer [principal reduction] to underwater borrowers.”

In response, the FHFA Acting Director Edward DeMarco said that the “FHFA’s assessment of the investor incentives now being offered will follow its previous analysis, including consideration of the eligible universe, operational costs to implement such changes, and potential borrower incentive effects.” Currently, Fannie Mae and Freddie Mac have 470,000 permanent HAMP modifications on their books.

Other aspects of the new HAMP iteration include extending the deadline through 2013, the same deadline as HARP 2.0, and changing eligibility standards so families confronting multiple debt payments (car loans, credit card bills, etc.) will receive more flexible debt-to-income criteria. Moreover, investor-owned properties will now be eligible for HAMP.

Law firm Keefe, Bruyette & Woods estimates that, with the inclusion of investor properties and less stringent eligibility requirements, HAMP could reach an additional 1.5 million borrowers. So far, HAMP has helped 900,000 homeowners refinance their loans, at an average savings of $500 a month. While the number isn't too shabby, it's well below the initial expectation of 4 million borrowers.

The two key question regarding the new HAMP is whether the measure will convince the FHFA to allow principal reductions on Fannie and Freddie loans, and what effect the changes will have on the non-agency market. These two questions will be addressed in this week’s issues of Inside Mortgage Finance and Inside MBS & ABS, respectively.


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What is it going to take to convince lenders to loosen the credit box (i.e., remove underwriting overlays)?

The recent rep and warranty changes announced by the Federal Housing Finance Agency should go a long way in protecting lenders from future buybacks and help expand mortgage credit.
There won’t be any significant elimination of underwriting overlays until the government stops seeking huge mortgage-related penalties and settlements from lenders.
There shouldn’t be any expansion of the mortgage credit box since looser underwriting is what caused the recent mortgage crisis.

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