Mortgage Write-Downs Granted Here, There – Not Everywhere

Fannie Mae and Freddie Mac aren’t granting reductions in homeowners’ loan balances, as has been widely noted of late. Nevertheless, a handful of Americans who have gotten into trouble on their mortgages are actually seeing their loan balances cut, as a debate rages in Washington about whether doing so on a wider scale will be effective.

More than 35,000 homeowners received principal reductions from their lender last year, the Office of the Comptroller of the Currency said in a report Wednesday. The total was up about 20% from about 29,000 in 2010. But it was still down 23% from nearly 46,000 in 2009, when banks started to write down loans acquired at a discount from failed institutions.

“Principal reduction modifications can be an effective tool in the overall arsenal,” said Bruce Kruger, the OCC’s lead mortgage expert.

Banks are mainly granting homeowners write-downs if they hold those loans on their balance sheet and tend to do so for loans that are significantly “under water”— meaning that the homeowner owes far more on the property than the home is worth. They are not permitted to do so for loans that they have sold to Fannie Mae and Freddie Mac, the federally controlled mortgage investors.

Principal reductions made up about 8.5% of all loan modifications completed in the fourth quarter, compared with 7.8% in the third quarter of last year and 2.7% in the fourth quarter of 2010, the regulator said.

The OCC’s quarterly “mortgage metrics” report covers 31.4 million loans worth $5.4 trillion, or 60% of U.S. home loans. Of those mortgages, about 3.8 million, or 12% had missed at least one mortgage payment, and 1.3 million were in foreclosure as of the end of last year.

Whether to encourage more loan reductions for troubled homeowners has been a matter of intense public interest. The Obama administration has stepped up pressure on the independent regulator for Fannie and Freddie to grant more reductions, offering new incentives to do so.

The federal regulator, the Federal Housing Finance Agency, has been evaluating the incentives the administration has offered. But the agency’s acting director, Edward DeMarco, has resisted doing so, saying that it may not make economic sense for Fannie and Freddie and could encourage more borrowers to default.

“We’re encouraging them to … look at it again because we think there’s a good economic case, a good financial case for doing it in some cases,” Treasury Secretary Timothy Geithner told House lawmakers on Wednesday.

In addition to Fannie and Freddie, other government agencies including the Federal Housing Administration and Veterans Administration do not grant principal write-downs.

Fannie and Freddie do use a similar form of loan assistance, known as principal forbearance. That kind of program does not require lenders to forgive debt. Instead, lenders set aside a portion of the loan, not requiring any payments on it until the borrower sells the home or pays off the loan.

Lenders’ use of this approach has grown significantly more than principal write-downs. They enacted nearly 103,000 principal forbearance plans enacted last year, up from about 94,000 in 2010 and 15,000 in 2009. In a letter sent to lawmakers in January, Mr. DeMarco indicated a preference for those forbearance plans, arguing that it “achieves marginally lower losses” for the taxpayer-backed company than principal forgiveness.

Mr. Kruger, the OCC’s expert, acknowledged that it’s tough to figure out which approach works better in the long run. “We have not been able to distinguish whether a principal reduction [modification] works better” than ones involving principal forbearance, he said.

Fatal error: Uncaught Exception: 12: REST API is deprecated for versions v2.1 and higher (12) thrown in /home4/jdvc/public_html/wp-content/plugins/seo-facebook-comments/facebook/base_facebook.php on line 1273