No Fannie/Freddie Mortgage Write-Downs For Struggling Homeowners Means More Cash For Uncle Sam
Since the housing crisis began in 2007, the major banks and the major servicers have paid nearly $130 Billion in fines and court settlements to settle mortgage fraud issues with Fannie Mae and Freddie Mac.
These settlements have brought Fannie Mae and Freddie Mac out of insolvency and on the path to profitability with a projected profit of $180 billion for 2014 with a projected profit of $190 Billion to $250 Billion in 2015.
Unfortunately, the likelihood of underwater homeowners receiving any type of a “thanks for bailing us out” gift from Fannie Mae or Freddie Mac in the form of a principal write downs have yet to materialize. Advocacy groups had hoped that principal write-downs would come after former Democratic Congressman, Mel Watt took the helm of the Federal Housing Finance Authority, the government agency that oversees Fannie Mae and Freddie Mac,
Unlike Watts’ predecessor, Ed DeMarco, who was appointed Acting Director of FHFA in the twilight of the Bush Administration, who fiercely refused to even entertain the idea of principal write-downs for homeowners, Watt appeared to agree with U.S. Treasury Secretary Jack Lew to the idea of principal write-downs during his nomination process. Even former Treasury Secretary and former Chair of the New York Federal Reserve, Timothy Geithner pushed for principal write-down during President Obama’s first term.
Watt has been in the captain’s chair of FHFA for six months and Fannie Mae and Freddie Mac are still refusing to give underwater homeowners a principal write-down.
Kevin Whelan, national campaign director of the Home Defenders League told the The New York Post, “The inaction by the FHFA, led by Mel Watt, limits the kind of help the government can offer homeowners — even though lenders like JPMorgan Chase, Citigroup and Bank of America have agreed to about $14.5 billion in consumer relief in three of the biggest settlements,”
Instead of principal write-downs, the FHFA supports the more bank-friendly principal forbearance. This is where the part of the payment is attached to the balance of the loan. This solution only creates a bigger debt for the homeowner because the deferred monies transferred to the back of the loan are still accumulating interest. So instead of loan amount of $350,000 owed the homeowner could conceivably owe $700,000 in 15 years on a house now only worth $200,000. Even if the value of the home increases to 2003 or 2004 levels, the homeowner would still be underwater ten. Homeowners will get a roof over their head for them and their families but at what price?
Homeowners can’t refinance and they can’t sell. So they are stuck paying Fannie Mae and Freddie Mac for at least another decade with all the profits going to the U.S. Treasury.
Contrary to all the hyperbole and rhetoric coming out of Washington about re-privatizing Fannie Mae and Freddie Mac or even replacing them, members of congress, from the anti-government Neo-Cons to the Uber-left, can see that Fannie Mae and Freddie Mac have become such a cash cow, especially with housing prices increasing, for the federal government that it is highly unlikely FHFA’s conservatorship of Fannie Mae and Freddie Mac will being away for long time.