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
What really sticks in agency MBS investors’ craw is
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
Watt has been noncommittal as to whether he will pursue widespread principal forgiveness for Fannie Mae and Freddie Mac loans recently. That contrasts
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.