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Jared Bernstein: More On Principal Reduction: A New Initiative From the White House That Should Help Clear the Path | Jared Bernstein | On the Economy


More On Principal Reduction: A New Initiative From the White House That Should Help Clear the Path: As I wrote the other day, reducing principal on homeowners with underwater mortgages is one important way to help them avoid foreclosure and help the economy get better faster.  It’s not for everyone—some homeowners simply bit off too much house.  But there are millions out there for whom this could work.

In this regard, I like the look of a new initiative by the White House just released this afternoon.  First, they’re sharply increasing the incentives—by a factor of three—in the part of their loan modification program (HAMP) that nudges the investors that own the loans to write down the principal.  Owners of loans used to get 6-21 cents on the dollar to write down principal; now they’ll get 18-63 cents.

Second, for the first time, they’re offering these incentives to loans held or insured by the GSEs (Fannie and Freddie).

A big boulder in the path to principal reduction has been the reluctance of the GSEs regulator, the FHFA, to play along—i.e., to reduce principal on the loans that Fan and Fred hold or insure.  And HAMP principal reductions were off limits to the GSEs. 

Well, according to the White House, they’re not off limits anymore:

To encourage the GSEs to offer this assistance to its underwater borrowers, Treasury has notified the GSE’s regulator, FHFA, that it will pay principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.

Now, FHFA acting director Ed DeMarco has consistently resisted reducing principal for reasons I discuss in the link above.  But he’s also said he’d go there if there were incentives to do so—some way to mitigate the losses to the agencies (and the taxpayers) from the loan forgiveness.  

Well, here it is, Ed…