Opinion: Why Mortgage Principal Forgiveness Policy is a Bad Idea
“By subsidizing exceptionally high-risk home loans, the feds’ so-called affordable housing policies have created moral hazards in the housing finance system. When the loans fail, it undermines homeowners’ ability to achieve responsible ownership.”
Why Mortgage Principal Forgiveness Policy is a Bad Idea
There’s nothing like a “good crisis” to give the federal government an opening to spread its tentacles further into private markets. Just look at the vast growth of federal housing programs since the 2007-2009 financial crisis.
Fannie Mae and Freddie Mac alone have added two housing slush funds on top of more nebulous regulatory requirements such as a “duty to serve” affordable housing credit to “underserved” markets. These are only a few examples of the array of federal affordable housing programs ginned up in the past eight years.
Washington has enormously expanded its influence over the nation’s housing finance system, in some cases enacting reforms that actually compound the policy errors that triggered the last housing market collapse.
Now, to add insult to injury, the Federal Housing Finance Agency has decided to implement a mortgage forgiveness program for severely delinquent loans guaranteed by Fannie Mae and Freddie Mac. It’s unlikely to work.
The FHFA’s forgiveness program is an additional intervention to prevent foreclosure for underwater and severely delinquent borrowers “still struggling in the aftermath of the financial crisis.” The agency estimates that, under one likely scenario, it could cost taxpayers up to $17 million.