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March 24,2017 The Honorable Brad Miller U.S. House of Representatives ll27 Longworlh House Office Building Washington, DC 20515 Dear Congressman Miller: Thank you for your March 11,2011, letter regarding the Enterprises' participation in principal reduction programs. I understand and share your desire to minimize taxpayer losses from Fannie Mae and Freddie Mac, and I would like to provide the reasoning behind my decision regarding principal reduction programs.
FHFA has evaluated principal reduction programs such as the Federal Housing Administration's Short Refinance Program and Home Affordable Modification Program's Principal Reduction Alternative (HAMP PRA) in light of its conservatorship responsibilities and the Enterprises continued presence as long-term guarantors and investors in mortgages. These programs may fĂŹt the needs of certain mortgage investors and may reduce foreclosures. FHFA understands that some mortgage investors have sought such solutions in order to recover today what principal they can on outstanding mortgages. However, I have determined that these programs as they work today, while they may be in the best interest of certain other mortgage investors, do not meet FHFA's conseryatorship goals.
FHFA and the Enterprises conducted significant analysis to evaluate participation in these programs, which I considered in making this determination. FHFA's decision was based on consideration of the potential benefits and costs to the Enterprises, which ultirnately irnpact taxpayers through the financial support agreements with the Treasury Department.
FHFA found that only a very small proportion of Enterprise loans would be candidates for principal reduction programs. Using FHFA's House Price Index to evaluate current market values, the agency found that less than ten percent ofborrowers with Enterprise loans have negative equity in their homes. Of these loans more than half are perfonning and thus not eligible for the HAMP PRA program or modification under the Enterprise securitization trust agreements. For performing loans, we anticipate many underwater Enterprise borrowers will remain current on their loans and honor their financial commitment. As noted below, providing refinance opportunities for these borrowers helps borrowers in achieving that outcome.
1700 G Street, N.W., Washington,D.C.20552-0003
. 202-414-3800 . 202-414-3823 (fax)
In contrast, non-Enterprise loans are far more likely candidates for principal reduction than Enterprise loans. Using data from the commercial Loan Performance database, which is widely used to track and analyze mortgage loan performance, together with FHFA's House Price Index, the agency deterrnined that loans backing private label securities were five times more likely than loans backing Enterprise securities to have negative equity. The costs of principal reduction include the immediate losses to be realized on otherwise performing loans as well as the costs of rnodifying technology, providing guidance and training to servicers, and the opportunity cost of diverting attention from other loss mitigation activities. The costs also include the requirements for accounting and tracking of principal reduction, which would be operationally challenging for the Enterprises' information technology systems. Given the limited population of Enterprise borrowers who would be eligible, and the limited expected benefit to the Enterprises relative to other altematives, such an investment does not appear warranted.
Going forward, for delinquent borrowers, FHFA will continue to require that the Enterprises pursue HAMP modifications, and then proprietary loan modifications that reduce the interest rate, extend the mortgage term, and provide for principal forbearance to help borrowers who are having difficulty afﾃ出rding their mortgage payments. For performing borrowers, FHFA recently announced an extension and other changes to the Home Aflordable Modification Program (HARP). HARP offers qualif,red underwater borrowers who remain current on their mortgages, but whose home equity has eroded as a result of declining home values and growing loan balances, an opportunity for a streamlined refinance. These efﾃ覚rts represent loss mitigation efforts that are consistent with the goals of the conservatorships and with helping families retain their homes. Should a source of funds outside the Enterprises emerge to cover some portion of the costs associated with reducing principal, FHFA would perfonn additional analysis. Similarly, if a targeted opportunity to utilize principal reduction programs be identified that minirnizes losses for the conservatorship, we will examine it. More generally, as market conditions change and new information emerges, FHFA will continue to assess the best strategies to minimize Enterprise losses while seeking foreclosure alternatives.
I hope you find this information useful. If you have additional questions, please contact Peter Brereton on my staff at (202) 414-3799.
Yours truly,
Edward J. DeMarco Acting Director