White House Pushes Fannie and Freddie to Make More Mortgage Modifications

The Obama administration is leaning on mortgage giants Fannie Mae and Freddie Mac to write down underwater loans and make life easier for homeowners who are at risk of default and may see their personal finances deteriorate.  The Federal Housing Finance Agency (FHFA) wants Fannie and Freddie to join a Federal Housing Authority (FHA) program that allows banks and other creditors, which agree to write down mortgages, to transfer the reduced loans to the FHA.

According to government estimates, between 500,000 and 1.5 million homeowners have the potential to benefit from the program.  This is a fraction of the 11 million homeowners who were underwater as of June 30, according to CoreLogic, Inc.  To put that number into perspective, approximately 23 percent of all American households with a mortgage are underwater.  According to the mortgage industry, the FHA program will be of minor benefit to the housing market unless Fannie and Freddie participate.  In its first three months, the program accepted 61 applications and modified three loans.

David Stevens, the FHA’s commissioner, said resistance by lenders has been frustrating.  Obama administration officials have given lenders “a responsible way to address borrowers with negative equity and if institutions are blatantly refusing” to participate, then that is “short-sighted.”  “Letting the status quo continue is going to be much more expensive than people think,” said Kenneth Rosen, a professor of economics and real estate at the University of California at Berkeley.  “We’ve got a downward spiral in housing here, and they’d better break the back of this with some shock and awe.”

Fannie and Freddie have been reluctant to reduce mortgage principal, primarily for the reason that it limits their opportunity to recover losses.  According to the Office of the Comptroller of the Currency, Fannie and Freddie have reduced only 10 of the 120,000 loans modified during the 2^nd quarter of 2010.  “We have historically counted on the fact that the vast majority of borrowers – even borrowers who are underwater – continue making their payments,” said Don Bisenius, a Freddie Mac executive vice president.