Fannie Mae and Freddie Mac are coming under pressure from the Obama White House to start reducing principal on loans that are under water and still current, according to a report in The Wall Street Journal.
It appears there are discussions about moving GSE loans through a Federal Housing Administration refinancing program, which requires a minimum 10% writedown. In this program a loan can be refinanced into an affordable FHA-insured mortgage with a 97.75% loan-to-value ratio.
If there is a second lien on the property, the combined LTV cannot exceed 115% after refinancing.
"We regularly review our policies regarding the modification of mortgages based on changing economic circumstances and our analysis of whether the effectiveness of the policies can be improved. We have been, and will continue to work closely with FHFA on these matters," said a Fannie spokeswoman.
The Federal Housing Finance Agency declined comment on the matter, as did Freddie Mac.
It appears Fannie and Freddie are reluctant to embrace principal reductions, which would hike prepayment speeds on GSE guaranteed mortgage-backed securities and hurt investors.
Credit Suisse researchers said Wednesday morning the rumor about Fannie and Freddie principal modifications could be a concern to the agency MBS market. If such a program were implemented, it would probably most affect 30-year MBS with coupons of 5.5% or higher, the CS researchers said.
The GSEs rarely reduce principal when modifying delinquent mortgages. And the results of Fannie and Freddie's refinancing efforts for borrowers with LTVs above 105% have been poor.
Their Home Affordable Refinance Program (HARP) has helped only 12,250 underwater borrowers refinance to a lower interest rate as of June 30. HARP was started in April 2009.
