From CNBC/The Street:
Deeply indebted homeowners with government-backed mortgages may have a fresh shot at receiving meaningful mortgage relief, but it will likely come with strings attached.
Earlier this week, President Obama nominated House Financial Services Committee member Mel Watt (D-N.C.) to head the Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac.
If confirmed, Watt, as the regulator of the agencies that guarantee nearly 60 percent of the U.S. mortgage market and back nine out of ten new mortgage loans, would have a major say on various aspects of government housing policy, including the $180 billion dollar question of what to do with the bailed-out mortgage giants.
While his confirmation is by no means certain—analysts expect stiff opposition from Senate Republicans—Watt’s nomination has been welcomed by consumer activists who have been calling for the removal of current FHFA acting director Edward DeMarco.
DeMarco has come under attack over the past year for opposing principal modifications, a contentious form of mortgage relief.
Proponents of principal reduction believe it is the most effective form of mortgage relief for deeply underwater borrowers—those who owe more than their homes are worth.
On principle, he argued that principal reductions were unfair as it punished borrowers who continued to make their mortgage payments despite being underwater. As the conservator charged with minimizing losses to the taxpayer, he said the program would be too costly to administer and could encourage “strategic defaults” by borrowers hoping to take advantage of the program. The costs outweighed the benefits, he concluded.
Watt’s nomination also coincided with the release of a report from the Congressional Budget Office this week that said implementing a principal forgiveness program at Fannie Mae and Freddie Mac could, under one option, generate as much as $2.8 billion in taxpayer savings.
But it remains to be seen if Watt changes his stance once he becomes director of the FHFA. In an interview with The Wall Street Journal, Watt said that he might reach the same conclusion as DeMarco. He wasn’t even sure if principal reductions should even be on the agenda.
“I don’t know what the timing would be of when I would get over there. It might be an issue whose time has already passed. And there may be information that would lead me to the same conclusion that they have already reached, if the issue is still a timely issue to consider. I don’t know how I would come down on that,” he told the newspaper.
The reason why mortgage investors and lenders are often unwilling to reduce principal on the mortgage, but are more willing to ease other terms, is because the borrower often gets the complete upside from the arrangement.
He gets to lower his payment and stay in his home, while the bank takes a loss. Then when the housing market turns higher, he is able to sell his home at a price higher than the loan amount and gets to pocket the difference.
Now with housing on the mend, the upside from rising prices could provide an even greater incentive to strategically default.