FHFA | Review of Options Available for Underwater Borrowers and Principal Forgiveness

Review of Options Available for Underwater Borrowers and Principal Forgiveness

In considering the use of principal forgiveness by Fannie Mae and Freddie Mac (the Enterprises), it is important to place this particular loss mitigation tool in the context of:

  • the Enterprises’ overall loss mitigation efforts;
  • costs and benefits of using principal forgiveness, including the economic benefit to the Enterprises and taxpayers in general;
  • the impact on borrowers’ behavior;
  • direct and indirect implementation costs; and
  • the overall impact on the mortgage market.

Since principal forgiveness is associated with providing assistance to underwater borrowers, this paper begins with a review of the scope of the underwater borrower problem. It then describes the Enterprises’ efforts related to underwater borrowers and summarizes the Federal Housing Finance Agency’s (FHFA) analysis of principal forgiveness.


Existing Enterprise loss mitigation efforts provide opportunities for all types of underwater borrowers. For borrowers who have the ability and willingness to pay there is HARP, which as the result of recent changes has been helping an increasing number of underwater borrowers. For borrowers who do not have the ability but do have the willingness to pay, both HAMP and the Enterprises’ proprietary modifications provide at least as much monthly payment relief as HAMP PRA. Finally, for borrowers who do not have the ability or willingness to pay, the Enterprises’ foreclosure alternatives, either through short sales or deed-in-lieu of foreclosure, provide an opportunity to exit their home without the harm to their credit standing that foreclosure produces.

In terms of the Enterprises’ adopting HAMP PRA, once the impact of strategic modifiers and the operational costs and complexity of implementing HAMP PRA were fully considered, the results of the model-driven analysis were insufficient to warrant the Enterprises participation in HAMP PRA. Both Fannie Mae and Freddie Mac conducted their own analysis of principal forgiveness, and that analysis is also being released by FHFA. The results are similar to those described above and in the appendix.

Full report below…




Review of Options Available for Underwater Borrowers and Principal Forgiveness

8 Responses to “FHFA | Review of Options Available for Underwater Borrowers and Principal Forgiveness”
  1. indio007 says:

    This statement is load of crap.

    “Simply put, they entered into financial contracts, effectively agreeing that the house was worth to them what they had borrowed (or more) and that they had the financial capacity and intent to makethe stated payments.”

    The corrupt appraisers set the value at the behest of banks trying to inflate the sum total of their fees.

    The homeowner had NO SAY in what the thought the house was worth. They were told what it was worth.

  2. Steve says:

    The time for dissent is now. The warnings are everywhere, the FHFA, the Treasury and the Banks are all on the same team, they prefer debt servitude and profit over any sense of morality. Fight these plutocrats – to the streets!

  3. 1ofthemany says:

    …Arrest them AND Edward Demarco “Problem Solved”!!!

  4. John says:

    I bet scam companies offering the lower debt and payments will be coming out of the woodwork.

    The point still is and always will be, who has the note and with all the selling of your mortgage and note, who do you really owe? Until that is answered, the deal anyone makes you is not real. Until you have that correctly answered, anyone can claim they are the one you should pay. When you find out they were the wrong one, months or years from now, they will have taken payments from you and will disappear.

    One thing for sure, whoever makes this debt reduction will have the note and mortgage all right in their favor this time you can take that to the bank!

    • ali says:

      Don’t look now but they already have. My phone is ringing and my mailbox is stuffed with offers. No thank you, “I’d rather be waterboarded”. I’m sure they can arrange that too. They made fools of the Judiciary and apparently above the law. How embarressing to have a goverment that allows our constitutional rights be trampled on BLATENTLY.

  5. Heather says:

    awesome. RESPONSIBLE homeowners get helped but IRRESPONSIBLE ones don’t. However if you are a coke-fueled frat-boy gambling addict entitled to membership in every 12 step program from gamblers to sex addicts anonymous, responsible for the total destruction of the economy by placing failed $5 billion dollar bets you will be bailed out.

  6. Peter J. Pike, Esq. says:

    They keep coming back to the “moral hazard”. This is pure baloney as far as I am concerned. There is always the moral hazard of someone strategically defaulting in order to obtain the rate reductions and principal forebearance currently allowed under FHFA HAMP. The TBTF banks seem to be able to make modifications that include principal reduction work, without every one of their borrowers strategically defaulting. While FHFA is a much larger share of the market, the TBTF banks have demonstrated in the past that they are unable to keep their own records straight, so I cannot imagine that their being such a smaller percentage of the market actually makes any difference in the strategic default rate, the ability of the FHFA to keep their models secret from the general public, etc.

    The one thing that this paper does not address, which is more damning to the FHFA’s position than any is the problem with forebearance and principal reduction as practiced under HAMP is that if the interest rate has to be reduced below today’s rates (which, by the way, are closer to 3.5% than the 4.625% that FHFA is currently allowing under their HAMP), those rates will increase by 1% per year after five years. In other words, they bring the payment down by reducing the rate to 2% for 5 years, but in year six, the rate goes up to 3% (an increase of 50%!) If someone was barely able to make the payments at 2%, they are going to go back into default at 3%.

    Instead of getting all excited about moral hazard, FHFA should do principal reduction, with an equity share, like some banks are doing. This way the borrower has an incentive to keep making payments, without payment shock in the sixth year, and the taxpayers get to share in the increase in value in the property, when it is ultimately sold.

    • Ken Hansen says:

      I can’t see how moral hazard isn’t applicable to borrowers when it is never applicable to banks, elected officials and regulators. Never. How hard is it to help families stay in their one and only home? Indeed, it is difficult when no attempt is made to do so, and the entire excuse is moral hazard. Moral hazard is a facetious argument, and a justification for oppression. Human rights and needs are never considered, nor discussed, this is one indication you are being lied to by authority.

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