CBO Report: Modifying Mortgages Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness

in STOP FORECLOSURE FRAUD
Washington, DC (May 1, 2013)—Today, Rep. Elijah E. Cummings, Ranking Member of the House Committee on Oversight and Government Reform, released a new report from the nonpartisan Congressional Budget Office (CBO) concluding that implementing principal reduction programs for underwater mortgages backed by Fannie Mae and Freddie Mac could save U.S. taxpayers billions of dollars by avoiding unnecessary defaults, help homeowners avoid foreclosures and remain in their homes, and stimulate some additional growth across the economy. “Today’s report demonstrates that principal reduction programs are a win-win-win for our country—helping U.S. taxpayers, American homeowners, and our nation’s economy all at the same time,” said Cummings.  “Rather than implement these programs years ago when their benefits were obvious, ideologues ignored this evidence and harmed our nation as a result.  I hope this report provides a new opportunity to anchor our nation’s housing policy in facts rather than partisan politics.” On November 9, 2012, Cummings and 44 other Members of Congress sent a letter requesting that CBO analyze the potential budgetary impact of Fannie Mae and Freddie Mac offering principal reductions as part of their loan modification efforts.  Specifically, they asked CBO to examine benefits to taxpayers in terms of avoided defaults, the expected costs to stakeholders of offering principal reductions, and the potential for addressing the costs of implementing such programs and the risks of so-called “moral hazard,” or homeowners failing to pay their mortgages in order to qualify for principal reduction. After examining multiple scenarios, CBO concluded that principal reduction programs at Fannie Mae and Freddie Mac could result in:
  • savings to the U.S. taxpayer, including up to $2.8 billion in one scenario;
  • a reduction in the number of defaults and foreclosures; and
  • a relatively small, but critical growth for the nation’s economy. 
  CBO examined scenarios to bring homeowners to 115%, 100%, and 90% loan-to-value ratio, and concluded that taxpayers and homeowners would benefit from programs that help homeowners climb out from their underwater positions.  CBO arrived at its findings after taking into account potential costs of implementing these principal reduction programs and after adjusting for risks of moral hazard.  CBO also concluded:  “Another potential effect of the options is a reduction in ‘house lock,’ a circumstances in which borrowers who owe more than the value of their home are constrained in their ability to move to take advantage of employment outside of their local area.” CBO explained that some of these effects, although positive, would be relatively small because it examined only the subset of underwater borrowers that would qualify for assistance under the current Home Affordable Modification Program (HAMP).  CBO stated:  “Policies with broader eligibility than those CBO analyzed could have larger effects.” Cummings has led the effort for several years to press Ed DeMarco, the Acting Director of the Federal Housing Finance Agency (FHFA), to implement principal reduction programs in order to comply with federal law requiring FHFA to protect taxpayer interests and provide maximum assistance to American homeowners. To date, DeMarco has refused to do so, even though his own analysis shows that utilizing principal reductions could save Fannie Mae and Freddie Mac as much as $3.6 billion, save U.S. taxpayers up to $1 billion on a net basis, and help up to 497,000 homeowners. Also today, Cummings praised the decision by President Obama to nominate Congressman Mel Watt to replace DeMarco as Director of FHFA.  On February 7, 2012, 45 House Members led by Cummings and Rep. John F. Tierney sent a letter urging the President to nominate a permanent FHFA director, and expressing concern with DeMarco’s refusal to allow even a pilot program to demonstrate the effectiveness of principal reduction modifications.