After tacitly supporting the policy and hinting at a definitive approach, the FHFA has delayed its decision on principal reductions.
Facing mounting support for the policy, Acting Director Ed DeMarco reversed himself somewhat in early April when he came out in favor of a principal reduction program with limited scope and specific targets among the nation’s distressed homeowners. DeMarco had originally said that his agency would draw definitive conclusions on the policy by the end of April.
According to a HousingWire article on the delay, American Banker first broke the news on Friday of last week, and a spokesperson for the FHFA has confirmed it.
“FHFA continues to work on its principal forgiveness analysis and is in discussions with the Department of Treasury. A final determination on the Treasury proposal for triple investor incentives for (Home Affordable Modification Program) Principal Reduction Alternative is being deferred until we conclude these activities,” the spokesperson said.
The Treasury plan referenced in the spokesperson’s comment relates to an expansion the department approved in January for the government’s Home Affordable Modification Program, where the Treasury would offer an increased incentive to lenders to write down the principal on distressed homeowner’s mortgages, rather than modifying them under the program’s highly particular set of standards.
Though DeMarco and the FHFA had long claimed that principal reductions would be too costly for Fannie Mae and Freddie Mac and, eventually, the taxpayers that are now supporting the GSAs to the tune of billions of dollars in infusions, a new study in April shows that under the new methodology advocated by the Treasury, Fannie and Freddie could save up to $1.7 billion in a principal reduction program. DeMarco had said, though, that the program would not be a sweeping panacea for housing, and would instead assist roughly 700,000 loans.
“This is not about some huge difference-making program that will rescue the housing market,” he said in comments before the Brookings Institute. “It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers.”
Isaac Boltansky, an analyst at Compass Point, told HousingWire that the delay is not glib; DeMarco has been detail-oriented from the start on the program, and he’ll continue to be regarding any policy commitment from the FHFA.
“DeMarco went to great lengths to detail operational difficulties in implementing this program,” Boltansky said. “In our view, this delay is likely due to increased scrutiny of the full analysis by the Treasury Department in advance of its release and continued pressure from administration officials.”
Ed Mills, an analyst at FBR Capital Markets, said the desire in Washington to compromise on the program’s details is taking longer than originally expected, given the program’s complexity.
“One of the concerns is the FHFA is doing this analysis on a very macro level,” he said. “There are clearly times where forgiveness can work on a loan-by-loan basis, but it’s a tougher call if you did it across the board. This is complicated analysis. It’s difficult to know all the factors.”