Big banks and Washington aren't on the same page—again.
Though lenders have long resisted entreaties to lower principal for underwater borrowers, Wells Fargo & Co. and Ally Financial Inc., formerly GMAC Inc., are poised to roll out pilots that would let such borrowers refinance into Federal Housing Administration loans and would write down the value of the credits.
But the decision coincides with House Republican efforts to eliminate the FHA Short Refi program that the pilots would rely on.
FHA Commissioner David Stevens has been pressuring big banks to adopt the Short Refi program because more than 20% of all homeowners have negative equity, where the value of the house is lower than the balance of the mortgage. Negative equity makes it difficult to modify or restructure a loan and has been a significant factor driving foreclosures.
A key obstacle for lenders has been the requirement to write down a loan by at least 10% and ensure that the total loan-to-value ratio is not greater than 115% after refinancing. To qualify, homeowners have to be current and must meet FHA underwriting guidelines. Banks and investors generally have been opposed to cutting principal particularly for borrowers who are currently paying their mortgage.
"We believe that principal writedown is absolutely needed, it's one of those key remaining variables left to address outside of modifications to get this economy—this housing economy—right-sized," Stevens told a House subcommittee Feb. 16.
Wells Fargo confirmed Friday it is currently working on a pilot of the FHA program for loans in its own held-for-investment portfolio. That way it would take a hit to its own balance sheet if it reduced principal for borrowers, said Tom Goyda, a Wells spokesman.
In the meantime, opposition to such programs on Capitol Hill has gained steam. House Financial Services Committee Chairman Spencer Bachus said he wants to eliminate four foreclosure-prevention programs including the Short Refi and Home Affordable Modification Program programs.
"In an era of record-breaking deficits, it's time to pull the plug on these programs that are actually doing more harm than good for struggling homeowners," Bachus said.
Just 182 borrowers have refinanced using the Short Refi program, which was started a year ago.
Another obstacle is that Fannie Mae and Freddie Mac, which control nearly half of the loans serviced by large banks, will not allow their loans to be refinanced through FHA. Doing so would affect the value of their performing loans and could trigger the need to draw more money from the Treasury.
Edward DeMarco, acting director of the Federal Housing Finance Agency, the conservator of Fannie and Freddie, sent a letter to the Department of Housing and Urban Development Secretary Shawn Donovan recently saying principal reduction was not consistent with conservatorship.
Dan Frahm, a spokesman for Bank of America Corp., said its participation in the FHA program was contingent on Fannie and Freddie's. "Given they own more than half of the loans we service, we believe only with their participation will the number of customers benefiting from the program reach critical mass," Frahm said.
