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Mortgage Forgiveness Could Save Uncle Sam Billions, Report Says

bizjournals.comMay 24, 2013

By Greg Lamm

Fannie Mae and Freddie Mac, the government-backed enterprises that own or guarantee more than half of all home mortgages in the U.S., played a big rule in creating the Great Housing Bubble of 2006.

But in the lingering aftermath of the housing crisis, Fannie and Freddie have been reluctant to forgive principal amounts on mortgages held by homeowners who are underwater on their loans.

But a new report by the Congressional Budget Office questions the Fannie and Freddie policy, saying it is misguided and is hampering economic recovery.

Fannie and Freddie have not allowed principal forgiveness for troubled borrowers, saying the policy would create a “moral hazard,” encouraging borrowers to stop making mortgage payments to get a reduction in the principal of their loan.

As as Fannie and Freddie go, so goes the banks. Bank of America, for example, has focused on other types of mortgage relief for troubled borrowers in Washington, ranging from “short sales” (selling a home for less than the mortgage owed on it), to reducing interest rates on some loans, or spreading mortgage payments over longer terms, even 40 years. Mortgage servicers also have been adding a balloon payment at the end of some mortgages, payable when a mortgage is paid off or when a house is sold.

But the new CBO report says about 1.2 million borrowers with loans under Freddie or Fannie could benefit from principal reductions.

At the end of 2012, about one in five home borrowers in the U.S. were underwater on their mortgages. The CBO estimates that 610,000 borrowers with loans backed by Freddie and Fannie either are delinquent on their mortgages or will fall behind in the next two years. Another 550,000 also could become delinquent.

By extending principal forgiveness to many of the 230,000 most troubled borrowers, the government could save $2.8 billion and avoid 43,000 defaults, the CBO says.

“Moral hazard” could be avoided by excluding borrowers who became delinquent after 2008, the peak of the crisis. Or homeowners could receive principal forgiveness only on a portion of their mortgage in exchange for giving borrowers a portion of the future equity on the home as it appreciates.

Since principal forgiveness was added to Treasury Department’s Home Affordable Modification Program (HAMP) as an alternative for struggling homeowners in 2010, one in four borrowers participating in HAMP have received a principal reduction, according to the CBO report.

As of the end of 2012, fewer than 120,000 borrowers have achieved a principal reduction through HAMP, according to the report.

Five lenders – including Bank of America, JPMorgan Chase and Wells Fargo – settled lawsuits by Washington and 48 other states over lending abuses, and have so far provided about $1 billion in relief for about 13,500 borrowers in Washington. But only about 900 borrowers in Washington have been offered permanent principal reduction on first mortgages, according to the most recent cumulative data on the settlement.

JP Morgan Chase updated its numbers Tuesday, saying the bank had completed all its all consumer relief requirements under the National Mortgage Settlement. In Washington, Chase said it's providing relief to more than 3,200 struggling borrowers, adding up to $268 million. Nearly 500 borrowers in Washington received principal reductions, totaling $50 million. On average, Chase said it reduced principal balances by $102,000 per homeowner.


Back to May 2013 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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