NOV 26, 2013

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What We're Hearing

Why Prospective New Overseer Worries More Than GSE Investors

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WE’RE HEARING now that Federal Housing Finance Agency nominee Mel Watt is set to replace acting director Ed DeMarco, both the agency and non-agency mortgage-backed securities markets are nervous.

Fannie Mae and Freddie Mac MBS investors can stomach the most immediate concern, an expanded Home Affordable Refinance Program. They’ll do this with just a little indigestion caused by the need to adjust their prepayment models. The HARP expansion could help lenders, who could use more loans.

What really sticks in agency MBS investors’ craw is the possibility of widespread principal forgiveness for underwater borrowers, as investors lack a historical model for that they can adjust, and there’s little that will spook investors quicker than a change in precedent that introduces unquantifiable uncertainty.

The already-skittish, struggling non-agency MBS market fears both this and the possibility that more government intervention from Watt could crowd its space. The non-agency world is afraid of agency principal forgiveness because Fannie/Freddie moves tend to have a knock-on effect on the private-label market.

A group of state attorneys-general and the Obama administration have had another view of principal forgiveness, as has the Treasury. Public resources should support principal widespread write-downs, and these could help struggling consumers with underwater loans as well as the economy overall, they say.

Watt has been noncommittal as to whether he will pursue widespread principal forgiveness for Fannie Mae and Freddie Mac loans recently. That contrasts DeMarco’s decision to rule it out on his watch, given the aforementioned capital markets complications it could cause.

The question is whether there is a middle ground between opponents and proponents of principal reduction. Finding one is one of those many things easier said than done, especially now that there is more of a rift between the two political parties in Washington.

Lenders historically have backed the securities industry in that they also had a firm opposition to principal reduction.

However, principal forgiveness can be in a lender’s or servicer’s interest if it maximizes the performance of loans where the borrower’s only other option might be foreclosure. Some on the servicing side of the business even say privately there has been a lack of needed relief in this area in which they can fault DeMarco for.

Circumstances where the industry feels principal forgiveness is necessary appear to be rare, though. Voluntary principal reductions account for just 10% of loan modifications done since 2009, according to CoreLogic data presented in a recent Standard & Poor’s report.

A national program requiring principal reductions for underwater borrowers would likely be of a wider scope and that is upsetting to MBS investors. It also could result in moral hazard in that it would conflict with lenders and servicers’ business interests as wells as investors’. It could also affect taxpayers. The AGs’ letter advocating for principal forgiveness does call for the use of “public resources”

Those are the key hurdles a principal reduction plan would have to surmount to move forward.

Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.

Comments (1)
This entire piece is on the one hand and on the other hand reportage with no perspective or understanding of the underlying problem. If there was no moral hazard in bailing out the banks that caused the crash with their bad loans and bad bets, providing the same banks negative interest rates (principal reduction for the banks) of 1/4 of 1% annual interest on loans from the Fed for the last 5 years, then why is there moral hazard in reducing the principal of underwater loans? If the properties were sold at foreclosure the loss to the lender would be even greater, not counting the economic loss to the neighbors and communities the properties are located in, the deterioration of the property after foreclosure and the economic loss/costs to the family that was foreclosed on. The "investors lack a historical model for that they can adjust" did not impede them from buying subprime & Alt-A loans that had no VALID historical model. The "investors" will be able to "adjust" when they have to, and the private label MBS market will not crash as it did in 2008. Solve the underwater loan/foreclosure problem and you will stabilize the housing market, and the private label MBS market as well for a solid long term recovery and greatly aid the economic recovery, including creating jobs with the lower monthly payments that will be spent on goods and services by the millions of families with underwater loans.
Posted by STUART FEINBERG | Wednesday, November 27 2013 at 6:00PM ET
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