Fannie, Freddie are set to reduce mortgage balances in California
As California pushes to get more homeowners into a $2-billion foreclosure prevention program, some Fannie Mae and Freddie Mac borrowers may see their mortgages shrunk through principal reduction.
State officials are making a significant change to the Keep Your Home California program. They are dropping a requirement that banks match taxpayers funds when homeowners receive mortgage reductions through the program.
The initiative, which uses federal funds from the 2008 Wall Street bailout to help borrowers at risk of foreclosure, has faced lackluster participation and lender resistance since it was rolled out last year. By eliminating the requirement that banks provide matching funds, state officials hope to make it easier for homeowners to get principal reductions.
The participation by Fannie Mae and Freddie Mac, confirmed Monday, could provide a major boost to Keep Your Home California.
Fannie Mae and Freddie Mac own about 62% of outstanding mortgages in the Golden State, according to the state attorney general’s office. But since the program was unveiled last year, neither has elected to participate in principal reduction because of concerns about additional costs to taxpayers.
Only a small number of California homeowners — 8,500 to 9,000 — would be able to get mortgage write-downs with the current level of funds available. But given the previous opposition to these types of modifications by the two mortgage giants, housing advocates who want to make principal reduction more widespread hailed their involvement.
“Having Fannie and Freddie participate in the state Keep Your Home principal reduction program would be a really important step forward,” said Paul Leonard, California director of the Center for Responsible Lending. “Fannie and Freddie are at some level the market leaders; they represent a large share of all existing mortgages.”
The two mortgage giants were seized by the federal government in 2008 as they bordered on bankruptcy, and taxpayers have provided $188 billion to keep them afloat.
Edward J. DeMarco, head of the federal agency that oversees Fannie and Freddie, has argued that principal reduction would not be in the best interest of taxpayers and that other types of loan modifications are more effective.
But pressure has mounted on DeMarco to alter his position. In a recent letter to DeMarco, congressional Democrats cited Fannie Mae documents that they say showed a 2009 pilot program by Fannie would have cost only $1.7 million to implement but could have provided more than $410 million worth of benefits. They decried the scuttling of that program as ideological in nature.
Fannie and Freddie last year made it their policy to participate in state-run principal reduction programs such as Keep Your Home California as long as they or the mortgage companies that work for them don’t have to contribute funds.
Banks and other financial institutions have been reluctant to participate in widespread principal reductions. Lenders argue that such reductions aren’t worth the cost and would create a “moral hazard” by rewarding delinquent borrowers.
As part of a historic $25-billion mortgage settlement reached this year, the nation’s five largest banks agreed to reduce the principal on some of the loans they own.
Since then Fannie and Freddie have been a major focus of housing advocates who argue that shrinking the mortgages of underwater borrowers would boost the housing market by giving homeowners a clear incentive to keep paying off their loans. They also say that principal reduction would reduce foreclosures by lowering the monthly payments for underwater homeowners and giving them hope they would one day have more equity in their homes.
“In places that are deeply underwater, ultimately those loans where you are not reducing principal, they are going to fail anyway,” said Richard Green of USC’s Lusk Center for Real Estate. “So you are putting off the day of reckoning.”
The state will allocate the federal money, resulting in help for fewer California borrowers than the 25,135 that was originally proposed. The $2-billion program is run by the California Housing Finance Agency, with $790 million available for principal reductions.
Financial institutions will be required to make other modifications to loans such as reducing the interest rate or changing the terms of the loans.
The changes to the program will roll out in early June, officials with the California agency said. The agency will increase to $100,000 from $50,000 the amount of aid borrowers can receive.
Spokespeople for the nation’s three largest banks — Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co. — said they were evaluating the changes. BofA has been the only major servicer participating in the principal reduction component of the program.