Journalism in the Public Interest

Fannie and Freddie: Slashing Mortgages Is Good Business

Adding an explosive new dimension to a politically charged debate on how to solve the housing crisis, the mortgage giants say that reducing the amount of money troubled homeowners owe wouldn’t just keep families in their homes, it would also save Freddie and Fannie money.

(Karen Bleier/AFP/Getty Images)

Update: On Friday, following the publication of this story by ProPublica and NPR, lawmakers called on the Federal Housing Finance Administration to provide Congress with the new analyses on principal reductions by Fannie Mae and Freddie Mac. In addition, Illinois Attorney General Lisa Madigan urged FHFA to immediately implement appropriate principal reductions to home loans held by Fannie Mae and Freddie Mac.

A version of this story was co-published with NPR News and broadcast on NPR's Morning Edition.

New analyses by mortgage giants Freddie Mac and Fannie Mae have added an explosive new dimension to one of the most politically charged debates about the housing crisis: Whether to reduce the amount of money beleaguered homeowners owe on their mortgages.

Their conclusion: Such loan forgiveness wouldn’t just help keep hundreds of thousands of families in their homes, it would also save Freddie and Fannie money. That, in turn, would help taxpayers, who bailed out the companies at a cost of more than $150 billion and are still on the hook for future losses.

The analyses, which have not been made public, were recently presented to the agency that controls the companies, the Federal Housing Finance Agency, according to two people familiar with the matter. Freddie Mac’s meeting with the FHFA took place last week.

The decision of whether to allow such reductions rests with Edward DeMarco, the acting director of the FHFA, who has steadfastly opposed so-called principal reductions on the grounds that it’s a bad business decision for the companies and would cost taxpayers money.

Many economists and policy makers contend that cutting principal — the amount of money lent to the homeowner — is one of the best solutions for keeping people in their homes and to bolster the fragile economic recovery.

But this solution has raised passionate opposition: Many borrowers who are paying their mortgages every month feel it is unfair. Why, they ask, should they have to keep paying the full amount while others who took a loan they ultimately couldn’t afford or saw their house plummet in value get a break? Some economists and policy makers argue that borrowers might intentionally stop paying their mortgages to score a reduction. Indeed, the prospect that the government would help troubled homeowners was a spark that created the Tea Party movement.

The companies’ new analyses were prompted by new Obama administration subsidies the government is offering Fannie and Freddie to reduce a homeowner’s loan. But it’s unclear whether DeMarco will take advantage of those incentives.

He declined to be interviewed for this story. But in a statement to ProPublica and NPR, DeMarco said that FHFA is assessing its position in light of the new Obama financial incentives, offered under the Home Affordable Modification Program, or HAMP. “As I have stated previously, FHFA is considering HAMP incentives for principal reduction and we have been having discussions with [Freddie and Fannie] and Treasury regarding our analysis.”

Both Fannie and Freddie declined to comment.

As an independent regulator, DeMarco does not answer to the president and can make policies that the administration opposes. Obama sought to replace DeMarco, but his nominee was blocked by Republicans in the Senate, which must confirm the agency head.

As recently as Feb. 28th, DeMarco told the Senate banking committee, “Both companies have been reviewing principal forgiveness alternatives. Both have advised me that they do not believe it is in the best interest of the companies to do so.”

Overall, principal reductions could help millions of borrowers who owe much more on their homes than their houses are worth, economists estimate.

And principal reductions can help lenders, because foreclosure often leads to bigger losses than reducing the amount owed. The biggest banks have long employed such reductions to curb their own losses.

The new analyses by Freddie and Fannie were done to assess the new financial incentives that the Obama administration announced in late January. ProPublica and NPR have not read the analyses, but two people described key aspects of them. The companies now find that reducing principal on troubled mortgages has a “positive net present value” — in other words, that doing it would bring in more money for the companies over the life of the loans than not doing it.

The two companies’ analyses showed that upwards of a quarter million borrowers who owe more on their mortgages than their homes are worth could benefit from principal reductions. The companies would take a loss upfront, but over the long run these mortgage modifications would save the companies money because they would lead to lower default rates.

Experts have said that principal reductions are one of the best tools for helping homeowners stay in their homes.

“Principal reduction works,” said Mark Zandi, chief economist of Moody’s Analytics. “If someone gets a reduction in their principal amount, it gives them a real powerful hook to really fight to try to hold onto the home, even if things aren’t going financially right for them.”

The re-default rate for homeowners who receive a principal reduction is lower compared with the rate on other types of types of mortgage modifications, Zandi said.  

Zandi estimates that principal modification could benefit 300,000 to 500,000 homeowners whose mortgages were backed by Fannie and Freddie. “And that would make a substantive difference,” he says, in helping the housing market and boosting the economy.

“It saves taxpayers money and makes homeowners less likely to default,” said Zandi. Given the Obama Administration’s policy changes, “I’m now perplexed why DeMarco is not more fully engaged” in supporting principal reductions.

Not everyone supports principal modifications. Anthony Sanders at George Mason University says that implementing such reductions risks triggering a wave of strategic defaults, where people stop paying on their homes in order to qualify for a break. “DeMarco is absolutely right,” he says.

The Obama administration’s new initiative triples the subsidies. They now range from 18 cents to 63 cents on the dollar, based on conditions such as how deeply underwater a borrower is. The subsidy works out so that generally the Treasury would pick up about half of Freddie and Fannie’s principal reductions, according to a person familiar with the incentives.

The subsidies are funded through HAMP, which used money from the Troubled Asset Relief Program (TARP), widely known as the bank bailout.  Much of that money has not been spent.

Under DeMarco, the FHFA has allowed Fannie and Freddie to do principal forbearance, rather than principal reductions. In such a modification, borrowers’ monthly payments are reduced, but they still must eventually pay back the entire loan. Critics contend that such modifications don’t provide as much incentive as principal reductions for borrowers to keep paying.

Despite the new findings, it still might not make sense for Fannie and Freddie to do principal reductions. Such a program might require substantial and expensive changes to their computer and accounting systems and might distract from the core business. In his statement, DeMarco said, “FHFA’s previously released analysis concluded that principal forgiveness did not provide benefits that were greater than principal forbearance as a loss mitigation tool. FHFA’s assessment of the investor incentives now being offered will follow the previous evaluation, including consideration of the eligible universe, operational costs to implement such changes, and potential borrower incentive effects.”

Yet even before the Obama administration’s new subsidies, the FHFA’s own data supported principal reductions for some borrowers, despite its opposition to using them, some argued. An American Banker analysis of the FHFA study, which the agency sent to Congress in January, suggested that principal reduction shouldn’t be rejected so unequivocally.

Whoa, there.  A plan that helps homeowners whose loans were fraudulently inflated to where they can’t afford them and only deals with “underwater” homes in passing?  How is that even possible!?

Seriously, it’s about damned time that someone figured out how to solve the problem.  Clearly, DeMarco won’t let it happen, since his entire focus has been helping the people who bought real estate as an investment, but at least someone has finally published the math.

It’s also a sound legal analysis.  These people (unlike the people making their payments every month) were victims of fraud.  What do you do with victims of fraud?  You go after the culprit to get their money back.

So do we continue to make up-to-date payments on these worthless homes or stop making payments in hope of principal reduction.  I am still confused.  I owe about 170% of the real value on my home, but it is still “my home”.  I contemplate walking away on a daily basis, but if I were to receive a principal reduction to any where near it’s real value I would do everything I could to continue to pay off the mortgage.
I did NOT buy my home with zero down, I put 20% down and have always paid on time.  If the banks are using my original value as an asset in their accounting, then we have a whole other problem and it is not mine.

Wow is this “the relief after the hardship”? Being someone whos praying and hoping for relief I have a hard time seeing how one can confuse someone who truly needs help from someone who’s just gaming the system.I know firsthand how difficult it is to qualify for one of these programs all the obstacles that’s put in your way. not knowing whether or not your family will be homeless from one day to the next. dealing with your family falling a part due to the stress that is so potent it that you could actually count the years you loose off of your life. consider the stakes…you could lose your home, and then not qualify for a home loan for 3 years, destroy your credit rating,and if you get evicted or locked out of your home a lot of rental agencies will not rent to you at least the rental agencies that you would consider renting from… People who’s situation is in “good shape"are helped by the hamp program people who are deeply underwater there’s the hamp2. People who are victims of this economy they just have to throw their families and themselves to the mercy of the big banks. how ironic the banks appealed to our sense of humanity when asking for a bail out and are so tight fisted when we ask them for their sense of humanity in bailing out home owners…who are ...too big to fail.

Is the analysis saying that it would be cheaper for taxpayers counting only the amount of bailout money going to Fannie and Freddie and disregarding the government subsidy spending on modifications not paid through those agencies? Is so that doesn’t seem like valid accounting. TARP money isn’t magic money. It comes from the same place all marginal spending of the government comes from: borrowing.

Jesse - thanks for your excellent work on this topic. However, the Obama nominee to replace DeMarco was offered 22 months into the new administration.
Democrats still in control of Congress would have presumably approved the Obama nominee had he been named sooner.
Obama’s delay is to blame for DeMarco’s toxic presence on these scene. Not “blocking” by the GOP. They were lying in wait and could have easily been outfoxed. But dallying foreclosed that opportunity.
DeMarco should have been removed immediately, or certainly within nearly two years. Major management fail by Obama, one of many on the housing front.

I’m tired of hearing help for Fanny/Freddy, FHFA loans.

What about those with loans owned by investors who won’t
allow banks that service the loans, to allow refi by the owner???

Current with payments, working and underwater!

It seems that this is a lie of ProPublica and there isn’t any analysis.
Who is behind NPR/Propublica?

The CEO of Freddie came out today and said that principal reductions may make sense now for the GSEs because the Treasury is going to cover part of the writedown.

But how in the heck is that saving the taxpayer money?  It just shifts the loss from one pocket to the other.

On another point, the FHA has nearly as many seriously delinquent underwater loans as Fannie and Freddie.  So why isn’t there any conversation about the FHA reducing principal on the loans they insure?

My car is no longer worth what it was when purchased. Yet I’m still paying off the loan based on the original value. Can I get a taxpayer financed write-down? If so, do I have to miss a few payments to qualify?

Kudos Carola for putting some real perspective on the situation of being underwater! At John, just because someone is “underwater” that doesn’t make them a victim of fraud and state that all of the homeowners experiencing problems with their home loans were victims is very presumptuous on your part. While Stated Income and NINA products along with ARMS resetting attributed to a large part of the Housing Fallout it is time for irresponsible borrowers to step up to the plate and own their share of the blame. Many home buyers were more concerned with having the home they wanted than actual affordability and were downright indignant at the suggestion that they lower their expectations. The very same people are the ones in foreclosure. Many fks simu lost their jobs and were unable to make their payments which led to late payments and ultimately foreclosures. Those foreclosures are what took the housing prices down causing others to be underwater. I agree with DeMarco and Stanley as we live in an “entitled” society and yes, there will be those that will want to work the system!

How about a bailout for those of us who sold our houses at the top and cashed out. Putting our hard earned equity into our retirement accounts so we could enjoy a better retirement only to see those who made bad choices on both the sell side, banksters; and unqualified homebuyers get bailouts. In the meantime, their reckless behavior has decimated my retirement account and minimized my returns with the Fed aggressively holding down interest rates so the losers can recapitalize their balance sheets while those of us who invested wisely are screwed? Just saying.

It seems to me that we all could use some sort of help one way or the other! i made a bad choice but when i contacted the Bank of America I was told that i was Irresponsible because i had no Idea what the next Ten years was going to do to me!

It seems to me that we all could use some sort of help one way or the other! i made a bad choice but when i contacted the Bank I was told that i was Irresponsible because i had no Idea what the next Ten years was going to do to me! Meaning going back ten yeard and seeing into the future! Any one have a Christal Ball that is not Broken?

Please please!!!!!!HELP…..Fl. was hit so hard that so many homes are no longer worth what people owe on them thur no fault of their own.

@mollie- Wall Street makes most of it’s profits on retail investors who buy at the top of markets. That’s the psychology they count on to maximize their gains. If you now find yourself underwater, you should know that you may have purchased your house so you weren’t “priced out of the market”. Those of us who have witnessed booms and busts recognized that a bubble was forming in the housing market. Far too many unqualified buyers were given access to loans they could not possibly pay for under normal circumstances. Now that the completely predictable correction has occurred, Bank of America’s solution is proper IMHO. Buyers who bought more than they could actually afford have to accept responsibility for their decision. Either walk away from the house or rent it back from the lender. In this case renting from BoA makes sense for both sides. As an individual who made the right call, I want residential prices to fall another 25 to 30% to get back in line with wages and rents in most neighborhoods. All of the Federal assistance will not prevent housing prices from falling back to their historic relationship to wages and rents. That’s a fact. So if you are trying to stay in your house because you have lost money on it, you are definitely swimming against the tide. It’s not worth it. Holding on to a stock or house that has fallen in hopes that it will return to it’s former price is just hope and hope is not a smart strategy.

@Hal-My hat is off to you! Guess you are generally considered one of the “smartest guys in the room”. I commend you on your above average intelligence and ability to foresee in advance such dire circumstances. You must be very proud of yourself.

Thanks, Roy, I’ll take your comment as positive. As the old adage goes; “if it seems too good to be true, it probably is”. When real estate prices rose close to 100% over 4-5 years with no increase in income, everyone should have seen it coming, don’t you think? How else can you explain what happened? I would rather people use their heads and keep from being fleeced by Wall Street and our banksters. I think it was Thomas Jefferson who said he was “more fearful of banks than standing armies”. His view was certainly prescient. We are hearing a lot of counterintuitive spin nowadays. There are many politicians who tell us we need less regulation of business, so they can grow. I think if there is just one thing we have learned from the subprime mortgage crisis, it would be that we need more not less regulation and oversight. The problems we witnessed just recently we the same ones that occurred during the Great Depression. The Glass-Steagall Banking Act was designed to remove these market excesses. Unless we want to see another recurrence of this financial crisis, we need to pass another Glass-Steagall and also break up the big banks Worldwide. You heat them crying now to deregulate them, but the reason they want less regulation is the same reason bank robbers prefer fewer cops. Let’s be honest, none of us has benefitted from the financial crisis other that those who created it for profit.

Good comments Hal.  I would also add that the fewest regulations necessary are desirable, with the caveat that they be the correct regulation to prevent and/or lessen the likelihood of these giant institutions following one another off the cliff in search of short term profits. Lax regulation will give us more crises like we’ve just experienced. And the “too big to fail” companies need to be broken up so that failure is always on the table.  Makes their Boards sit up and pay attention.

There are no victims, just volunteers. If you can’t afford it, rent.

There is NO mandate, nor regulation stipulating home ownership. Make no mistake, banks can be a crooked as a dog’s hind leg too and I have no sympathy for any losses they may incur, but the notion of rewarding underwater homeowners is a slap in the face to capitalism, responsible homeowners, renters and most importantly, underwater homeowners. Enabling and entitlement as an economic model, doesn’t work…

We teach children,

    Humpty Dumpty sat on a wall,
    Humpty Dumpty had a great fall.
    All the king’s horses and all the king’s men
    Couldn’t put Humpty together again.

We all learned it. Yet we always look to the king’s horses and men when things fall apart. The homes we own, the clothes we wear, the cars we drive have become symbols of who we are. When your life ends your stone won’t mention what brand of suit you’re buried in, won’t have an etched image of your abode, nor be inscribed with the car you drove. It won’t be until we, as a society, change our emotional appetites and begin treating banks and business as coldly as they treat us get the change we’d like.

“Rewarding underwater homeowners is a slap in the face to capitalism”???  I fear that ship sailed when we offered zero interest loans to the financial community in order to bail them out of some extremely irresponsible investments.  Socialism for the corporate community and capitalism for the masses is not my notion of a great country. If we fear the idea of “moral hazard” it should apply equally and we should have let the large irresponsible banks go down in flames to be eventually supplanted by more nimble, stronger and smarter entities.  That is what makes a capitalistic society successful
In response to the comparison to “cars”.  A home is a totally different animal.  Real estate is unique and it is where your family emanates from.  School, community, employment, civic pride, all are involved in a “home”.  I don’t think the same could be said for a “car”..

We bought our home below market value but, were forced to pay PMI?

We had to get a second appraisal to get the PMI removed.

The lawyer that did the closing lost his license?

We are not under water and have never missed a payment or been late in ten years.

We don’t qualify for any type of loan modification and can only refinance for several thousands of dollars to have our interest rate reduced. What’s up with that?

I couldn’t agree more with your analysis RJ, but the elimination of lending standards came before borrowers were lured into these problematic loans. It was the private/shadow banking system, not Fannie and Freddie that discarded the “conforming loan” model. Unqualified borrowers have to take responsibility for their decision to take on more mortgage than they could reasonable repay, but accountability cuts both ways. Corporate welfare is an undeserved entitlement also.  We need to stop enabling some of the World’s largest and most profitable corporations to shelter their income offshore. GE had some had $10.3 Bn. pre-tax profit in 2009 and received a $1.1 Bn. tax credit. XOM, the second largest company in the World, has received excessively large tax credits just because it was able to buy the lobbyists who bought the legislators who work for us. I understand how the corporate giants used their enormous monetary clout for political favors over the years to carve out preferential tax treatment. We are hemorrhaging revenues since the Great Recession started, yet these extremely profitable enterprises get handouts from Federal tax coffers for exploration and use their lobbying heft to demagogue climate change, for example, which is no longer being questioned by serious climate scientists. I say this a an Exxon Mobil and GE stockholder. Their corporate behavior is reprehensible. It’s simply unpatriotic. Give me a smaller dividend and pay your fair share of taxes rather than pushing the debt onto the middle class taxpayer and threatening their social safety net. Stop playing games with the tax code simply because you can afford better lawyers than the IRS. Don’t be bullies. What ever happened to the kind of corporate leaders who sought a win-win situation for themselves and their communities? The Henry Ford’s who paid his employees enough so they could afford to buy the cars they were building? Don’t they teach ethics in business schools anymore? Can we ever be a great nation again with this kind of “leadership” destroying the middle class?

So when do we the taxpayers get some of the “hyper equity” built up by these Florida and California folks during the go-go years?  Let’s just load up the folks who have huge capital appreciation in their paid off houses in those states with the debt reduction needed to bail out their high living late comer buddies.

@ Hal: We’re on the same page. Capitalism—and society for that matter—have been bastardized by institutionalized narcissism. By design, capitalism’s calling card is supposed to be opportunity. Self-interest at any cost, has morphed it into pure, unadulterated greed and what’s worse, it’s done “in your face” and with government sanction…the same government that’s supposed to watchdog the perps.

I’ve reconciled that the USA that I grew up with is dying (dead?) and I don’t see it coming back. For a society that’s supposed to be more “enlightened”—and I equate that word with ‘full of sh*t’—we’re:

more racist
more unemployed
more corrupt
more extreme
more hateful
more (insert pejorative quality)

In the context of the aforementioned article, the government cannot backstop $100 Trillion in unfunded liabilities and as the situation grows more ominous, we’ll attract less qualified individuals to lead, which will further exacerbate problems. Until we have a leader by, for, and of the people (read: middle class), instead of the elite, we’ll become a third-world sh*thole. The elite will have circled the wagon as they have—and want—to keep theirs.

No bailouts, for nobody, with no exceptions. Sink or swim, as necessity is the mother of invention…

Quite a flashback here from the self-righteous.  Anyone who has been keeping up with this phenomenon has doubtless read many stories of legitimate victims of this “crisis.”  Victims not just in the matter of accepting consequences of a bad decision.  Victims in the manner of suicides, and other despair beyond measure. 

It is easy to pretend that the majority of Americans who participate in this culture are financially adept.  In fact, a large proportion are skilled in other ways, but depend upon some degree of trust in experts when it comes to making the necessary financial decisions.  That is why we have accountants, financial advisors, bankers, and all the others who justify their highly-paid existence on special skills the masses do not possess. 

You can’t have it both ways. Those who blame the masses for not being smart enough to see the lizards are in denial. 

So the true victims of the housing crisis are either the financially naive or the victims of the larger recession.  Even omitting the greedy speculators who everyone agrees should eat dirt and die, what about the rest?

As someone who made a judicious and informed housing purchase at the height of the “boom,” and has endured plummeting values and a mortgage modification since (which helped not a whit after all), I can truly say that those who criticize should walk a mile in my shoes!

As a taxpayer, I would support these principal reductions under five conditions.

1. That the homeowner-beneficiary has to report the principal forgiveness as ordinary income on the 1040 and pay the appropriate taxes.

2. That Fannie Mae and Freddie Mac be prohibited from issuing new debt to buy and securitize mortgages, and that once their current portfolios run-off, they be put out of existence.

3. That the homeowner mortgage interest deduction be eliminated

4. The the capital gains exemptions for owner-occupied dwellings be eliminated.

These steps together would end the mindless subsidization of the mortgage banking and housing industries once and for all and serve as a governing mechanism to prevent speculative bubbles in the future.

@SAL ... you’re using moral relativism to justify your point. You can walk away and rent. End of story. Yeah, your credit will get dinged and you won’t be able to buy for another 3 - 7 years, but that’s part of the deal. But please…don’t ask me—a renter—to financially support those who can no longer make their mortgage payments. And if you’d made a “judicious and informed housing purchase at the height of the boom”, you’d have realized the unprecedented median income/home price ratios were historically unheard of.

And btw, suicide is a choice, not an involuntary act. The banks, the buyers, the investors, the realtors, the mortgage companies, the politicians ... EVERYONE involved, was complicit in making this economic boondoggle come to fruition. They are ALL to blame. And if it’s sympathy they’re looking for? It can be found in the dictionary in between sh*t and syphilis.

Make that four conditions. My wife called me away before I could proof read my post.

Kay Lillie, your premise is flawed - “What about those with loans owned by investors who won’t allow banks that service the loans, to allow refi by the owner???”

It’s not the investors who are denying refi’s. It’s the fraud-servicing banksters who are doing it. They’re not even taking it to the investors for approval. The banisters are making $1200 for each mod and refi application. They’re “losing” paperwork or telling homeowners they didn’t submit the proper paperwork or insisting they need more paperwork, each time filing a fraudulent app that they know will be denied, and then they start all over again. These applications make them money. It’s in their best interest to the tell the homeowner (eventually) that the investor is denying it, when in fact, the investor has no clue.

@Sal- I don’t think anyone can claim to be naive in this housing crisis. If you look at the polls done by Dr. Robert Shiller just after the RE crash, homebuyers expected double-digit returns over the next decade despite the reality that housing prices had tanked. They were totally unrealistic. Whether you buy a diamond, a flat screen TV, a stock or a house; it can go down in price as surely as it can go up. I have walked a mile in your shoes. I had bought many things in my lifetime that have declined in value. The difference I see now is that both buyers and sellers want those who “got it right” to absorb their losses. That’s completely unfair and sets a dangerous precedent.  I say “buyer beware”.

Spot on David Heitel. What I find very unsettling is homeowners who now want to refuse to give up their “ownership” of the property so they can keep their “investment” position in case real estate appreciates in the future. What most people fail to understand is that they don’t “own” their house. They just own a mortgage. This is a liability, not an asset, and those who were unqualified to purchase a house with a normal mortgage should not be allowed to keep it today solely with the assistance of taxpayers IMHO.

I’m confused.  Does the analysis say that principal reductions would save taxpayers money, or does it say that when Fannie and Freddie factor in “incentives” paid by Treasury (that is, taxpayers), principal reductions in some cases save Fannie and Freddie money, after factoring in subsidies from taxpayers?  Not at all clear in the article.

I agree that rejecting principal modificatons in all cases doesn’t make sense per se.  But that is different from a systematic and well publicized program that allows principal reduction modifications, as that most decidedly could impact borrower behavvior in ways that may or may not make principal reductions a net cost to taxpayers.

I agree….but I will not give my password

Raymond Willis

March 27, 2012, 9:16 a.m.

The real estate market, at least for a half century, sky rockets, then drops back.  Example: 1300 sqft, Orange County, Calif. 1962 - Value $9,000.  1972 $20,000 1975 $17,000,  1981 $130,000,  1984 $100,000,  1992 $180,000   1994 $155,000,  2006 $550,000 2012 $400,000.  Hello!!!  2016 $900,000.  Hold on to your house if you can.  OK, for some, now it’s worth less than owed.  Wait.  It WILL go way up again.  You dump it just because it isn’t worth enough, you destroy your credit, and in a few years you will never be able to buy a home again, enjoy huge profits, and, you’ll be a renter for the rest of your life, living hand to mouth.
  Govt solution:  For people who can’t pay all their mortgage anymore, change the loan to a 40 or 45 year loan.  Homeowner gets reduced payment, FNMA/ FHLMC will still get all their money eventually.  Reducing the loan amount encourages people to default.  If they lost their job, they can’t pay anything let alone less, and FNMA / FHLMC lose money on the ones that would have kept paying.
  Not paying because of negative equity is stupid.  The house will go way back up in a few years and you will be ‘rich’.  Hold on to your house if you can.  Reduced payments, thru some method, is the answer.  Some people are out of work and can’t pay anyway.  People with the 5 year ARM’s, 30 due in 5, adjustables with payments that have gone up, they are the ones that can be saved.  People that can’t afford the higher payments.

Raymond Willis

March 27, 2012, 9:30 a.m.

Regarding putting FNMA & FHLMC out of business:  They didn’t do anything wrong.  It’s the PEOPLE in charge of F & F who made bad decisions, and probably knowingly.  F & F have a necessary place in the U. S. real estate market.  The banks have taken the multi-billions Obama gave them without requirements and used them in higher paying investments than a couple % they would make from approving 3.8% loans.  Without F & F & FHA, the real estate market would have totally imploded by now.  No purchases, no refi’s, nada.  We need F, F & F.  But, we need them to be run by people who get their bonus 5 years down the road, if, by then, the decisions they made have proven to be beneficial.  Not a bonus because business increased today due to decisions that are going to fall apart later.

@RaymondWillis- you do know that the highest percentage of “strategic defaults” come from wealthy borrowers who can pay their mortgage even though they’re underwater and have decided it will simply take far too long for their investment to regain it’s lost value. So, one way to look at your housing investment is to use an example. If you bought a $500K house with 10% down, you’d have $50K in the game. If that house depreciates 50% which has occurred in some neighborhoods, you are now down 400% of your investment (the $250K loss minus the initial $50K invested). If housing prices follow their historic returns of 3.3% (1900-2010), it would take many decades from here assuming we have reached a bottom to even return to your initial price. Since we are witnessing very slow job and wage growth, I can’t imagine any appreciation for at least another 5-8 years. There is way too much inventory, not to mention the fact that banks have hidden a lot of their foreclosures because they don’t want to put it on the market under the current pricing situation. As was suggested, it will take just 3-7 years to re-establish credit if you were to walk away from your house now versus many decades to get even. Does this strategy make any sense? Many large real estate investment companies have walked away from their contractual mortgage obligations for business reasons. Take, for example, the default by Tishman Speyer/Blackrock on their $5.4 Billion Stuyvesant Town-Peter Cooper Village project that was purchased at the peak in 2006. This was the largest residential default in history. Do you think Speyer Tishman or Blackrock care what people think about their decision to default?

Finally, while it’s not popular because so many buyers are underwater right now. It must be stated that housing prices will not stabilize until they reach their historic relationship with wages and rents in a neighborhood. Prices are still way above their trend line which says they must fall further. All of these government interventions simply delay the inevitable outcome and push a recovery and normal appreciation further down the road. When you ask for 40/45 years mortgages at 3.8%, you are not recognizing the fact that this is precisely the reason, we will not see normal appreciation anytime soon. The reason banks refuse to write down mortgages and extend loans to distressed borrowers is that most of these loans fail again within a few months. It has nothing to do with the fact that the TARP funds which were doled out to the banks under Bush, had no strings attached. In the simplest of terms, people who should have stayed renters should now return to renting. It is a lot cheaper, besides. They’re just hung up on the title, “homeowner”, for all the wrong reasons.

Pauline George

March 29, 2012, 4:58 p.m.

I have paid my house mortgage for over 25 years and the minute I am without a job they want to kick me out.  I have called many help line professionals and still have not gotten any real help.  I am still unemployed and about to turn 61 with No where to go, where is the help that I was told with be there as a part of the american dream?

Pauline - I don’t know what state you live in, but I would stay put as long as possible. In Fla, it takes years for them to kick you out. You might ask your local bar association if there are pro bono options for you - free lgal help. Check it out.


April 18, 2012, 4:59 p.m.

One way I have seen some lenders modify their borrowers loans:

DEFER a portion of the balance to the end of the term (end of the loan) with no interest accruing.

This will immediately reduce the ACTIVE balance, and at these low interest rates - make the loan affordable.

If the homeowner makes on time payments for 3 years the deferred amount if forgiven.

This article is part of an ongoing investigation:
Freddie Mac

Freddie Mac

The taxpayer-owned mortgage giant made investments that profited if borrowers stayed stuck in high-interest loans while making it harder for them to get out of those loans.

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