DeMarco: Forbearance Protects Taxpayer Upside, Over Forgiveness

Acting Federal Housing Finance Agency Director Edward J. DeMarco spoke to the Boston Security Analysts Society on Wednesday, in part defending his stand against principal reductions for Freddie Mac and Fannie Mae Loans. 

DeMarco said that the two government sponsored enterprises (GSEs) own or guarantee 60 percent of the outstanding mortgages in the country but account for only 29 percent of seriously delinquent loans.  Even with this small share of the nation's delinquencies over half of the modifications done through the Home Affordable Modification Program (HAMP) are on GSE loans.  Between HAMP and the GSEs' own proprietary programs there have been more than 1.1 million modifications of GSE loans completed since the fourth quarter of 2008.

It has been well-publicized, DeMarco told the audience, "that there is one form of loan modification that FHFA has not embraced, that being principal forgiveness."  The disagreement is not about helping underwater borrowers, he said, both the GSEs and FHFA have been making great efforts on their behalf when they have the ability to make their payments and a willingness to do so.

The fundamental point of a modification is to adjust the payment to an affordable level.  This lower payment rather than loan-to-value has proved to be the key to a successful modification.  The GSEs achieve this through principal forbearance, which is charging a zero rate of interest on the forbearance amount and deferring its repayment.  This makes the monthly mortgage payment affordable, keeps the borrower in the home, and if the borrower is successful in this modified loan preserves for taxpayers an ultimate recovery on the debt.

In other words, the method used by the GSEs produces the same lower payment as a modification based on principal forgiveness and if the borrower ends up defaulting on a forbearance the loss to the taxpayer will be the same.  However, if the borrower is successful the taxpayer retains the opportunity to benefit from the upside, "a reasonable deal given the support the taxpayer has provided to assist the family in keeping their home."

DeMarco said this approach also recognizes that three out of four deeply underwater borrowers on the GSEs books of business are current on their loans.  Their continued willingness to meet their obligations should be recognized and encouraged, not dampened with incentives to discontinue payment.

The Treasury Department recently proposed an incentive program for principal reductions through HAMP and DeMarco said that FHFA is evaluating the proposal and expects to have a decision this month.