GSEs “Responsible” to 13 Percent of Underwater Borrowers

The CBO believes that Fannie and Freddie could “slightly” boost the economy with the addition of principal forgiveness.

According to a new report from the Congressional Budget Office (CBO), Fannie Mae and Freddie Mac are responsible for “nearly 13 percent” of underwater borrowers in the country. This does not mean that they caused the underwater situation, but that they hold the loans that are presently in negative equity. The CBO report directly addresses controversial suggestions that Fannie and Freddie modify loans by reducing principal, something that acting Federal Housing Finance Agency (FHFA) director Edward DeMarco has steadfastly refused to entertain. According to the CBO report, reducing principal on underwater GSE loans via the Home Affordable Modification Program (HAMP) would not only result in “small savings to the government” and “slightly reduce mortgage foreclosures and delinquency rates,” but it would also “slightly boost overall economic growth”[1]. The report also suggests offering principal forgiveness only to borrowers who are already behind on payments when the principal forgiveness program goes into effect, thereby eliminating strategic defaulters who might stop paying their mortgages later in order to get a better rate[2].

The CBO estimates that about 610,000 borrowers qualify for HAMP assistance at this point in time, but also suggests modifications to the program to bring in an additional 550,000 borrowers. The report also suggests that principal forgiveness might be balanced out by borrowers agreeing to grant the lender the right to future increases in home value. The CBO report provided some congressional representatives for grounds for some strong words for the GSEs’ slow implementation of the HAMP program, saying that “rather than implement these programs years ago when their benefits were obvious, ideologues ignored…evidence and harmed our nation as a result.”

Do you think that principal forgiveness is a good idea for the taxpayer-funded GSEs?

Thank you for reading the Bryan Ellis Investing Letter!

Your comments and questions are welcomed below.


[1] http://nationalmortgageprofessional.com/news37161/cbo-report-finds-gses-responsible-13-percent-underwater-borrowers

[2] http://thehill.com/blogs/on-the-money/1091-housing/297259-cbo-report-principal-reductions-could-save-billions

Comments (15)

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  1. JGalt says:

    No, but I’m glad SOMEONE has finally given my idea of taking any principal cram down and putting it on the home as a silent second. It will cost them nothing until they sell, presumably when the home is worth more. I’ll be the IRS is figuring out how to tax the gain from a cram down, and it’s not fair for we, the taxpayers, to essentially subsidize risk, ie, to compensate people whose homes lose value without expecting to share in the gains in value later. Worst case, if the home never gains value later and its lost to FC anyway, the silent second is wiped out.

  2. Reginald McFarland says:

    Well That’s the way we do things in this country.WE cause problems that we say are solutions, Then the Generation that caused the PROBLEM TO BEGIN WITH wILL JUST PASS IT ON TO THE NEXT GENERATION. Until we as a Nation change this we will continue to begin Falling Behind The Other Nations. There are also a Number of other so-called Fixes That are rising to also become problems!If you want my advice then get a Financial Education and Learn to invest before you make a CLOWN of yourself, and lose it ALL!

    • common sense says:

      “WE” is the federal government applying the Dodd/Frank legislation that Killed the housing market. The feds did this by making appraisers use forclosures in the appraisal value. ANYONE will look like a clown when you play the first half of a football game and then the second half is baseball. It is just unreal how stupid these politicians are. Cut ANYONES port folio value by 50% or more over night and you will get what we are getting.
      The results speak for themselves. NO end in sight! The banks will always use the worst loan balance for your value. ALWAYS!!!!!!!
      This is what IS going on. What is sad is how the banks lied about the modification programs and in turn are being sued and losing.
      Even worse is the people who do not understand that you must get an attourney. no end in sight.

  3. Tom says:

    Well, taxpayers bailed out the “Banksters” who created the ponzi profit scheme. The “Banksters” were in it for the profits. The “Banksters” kept those profits and got the taxpayer bailout too. The ponzi profit scheme was responsible for creating the environment that caused many homeowners to get into their situation. So why not bail out the victims? In the end, no matter what, taxpayers are going pay the bill in one way or another anyway. Why not do it sooner, where it will most like cost less and most likely do the most good?

    • Alex says:

      I fully agree with you. I’m upside down over $100,000 and I have no end in sight. On the other hand, the behavior of the banks has been deplorable.

  4. Mark says:

    With all the illegal gains the banks have earned from the mortgage meltdown , it would be about time the government steps up and do what should have taken place a few years ago. We the people have bailed out the banks and are now I’m debt up to our eyeballs. Grant a principal reduction to fair market value to those who can support the monthly payment with no repercusions later on. For those who cannot prove income let them sell with no repercusions or give house back via deed in lieu.

    • Big Dave says:

      Mark, what we should learn from all of this mess is that government is the problem. They are only concerned for the people when they are on TV. It was the gov’t in the 90’s who allowed the banks to become casinos, so their gains were NOT illegal; it was the gov’t who allowed the legislation to allow banks/credit companies to run roughshod on our wallets with outrageous new fees and loan shark interest rates. They are in bed together and the gov’t won’t do anything about it. Why do our legislators not have the same retirement and medical programs we are supposed to adhere to/ pay for? The government is not looking out for you-you need to look out for you until we can change the current path of our government.

  5. wt says:

    Exactly what I have said in the past. If Fannie/Freddie/banks would have just give the principle reductions to deserving homeowners (again those who invested their own money to get into their homes)first and then down the ladder, all those homes would have not been foreclosed on and gaurantee over 70% of current struggling homeowners would not be in the mess they are in now. Had the banks done this from the GET GO, they would have also not wasted billions of dollars on UNETHICAL GREEDY ATTORNEY FEE’S (up to 100K per case),renovation fee’s(up to 50K per case depending on location) and realtor commissions ($20K to $30K avg per case again the location). Therefore, an average of $100K to $150K per case out the window. So, bottomline if were talking 1500 to 2000 already home loss’s to date that equals $250,000,000.00 to $300,000,000.00 not including the current struggling home owners that the banks have already started the foreclosure process and to still pay these unethical attorney’s that could easily add up to another $150,000,000.00 to $200,000,000.00 for a grand total of $500,000,000.00…UNBELIEVABLE!! There are still thousands of low income/middle class homeowners currently in the RED AND NEED HELP. All that money that has been thrown away, could have been used to help the previous home loss’s and the current that are still struggling. These government people and those GREDDY CEO’s running these banks are REAL STUPID AND IGNORANT!! It’s time to either reduce the principles or simply send out the deed’s to homeowners granting them full release of their mortgage obligations (no recourse of any kind) specially for those homeowners again who invested with their own money as down payments of $100K to $150K in their homes to get into these loans that were over $200K to $400K and are all currently losing their equities. Once, this is done right, their will be no doubt the economy will bounce back.

  6. Juan Peguero says:

    When they Decided to label failed financial institutuion ‘ Too Big To Fail” they should had included real estate assets under water there too.

    A novel prize winner in economics made that suggestion years ago but he was ignored.

    Regardless label or not, the important think is to make sure to address the unemployment or the lack of enough income those home owners are dealing with right now.

    What about help those home owner with jobs or help them created their own jobs? Obviously you can’t make any payment modification or principal reduction if you don’t have a job or your self employed can’t generated enough income to meet those obligation.

    Juan

  7. Gary Horton says:

    The Banksters, real estate agents, appraisers, builders and our government all allowed this crap-storm to happen. The taxpapers have already taken a bath on this issue. Let the upside down homeowners get a silent second mortgage. No Tax Payer Subsidizing! Period!

    No more bailouts for my grand kids to pay off! Period! No more bailouts to airlines, auto companies, banks, wall street, upside down homeowners, foreign govenments or illegal immigrants. Stop the freaking madness. My grandkids will never see the light of day for all the taxes they will be paying because our politicians cannot say no for fear of not getting re-elected. Term limits is our only hope!

    Has this country not learned anything after the 2008 meltdown? Do we think that this country is to big to fail economically? Oh, I forgot we can just print more money. May God Help Us!

  8. Alex says:

    We’ve heard noises before that President Obama might nominate Rep. Melvin Watt (D-N.C.) to replace Ed DeMarco as director of the Federal Housing Finance Agency, the agency the regulates Fannie Mae and Freddie Mac.
    I find it hard to believe that it was a coincidence that this announcement was made official right as the Congressional Budget Office released its findings that principal reduction on underwater mortgages could save taxpayers up to $2.8 billion.
    DeMarco’s opposition to principal reduction has been the reason behind a massive movement calling for his replacement. I find it believable that the President felt more comfortable heading into a Senate confirmation process with CBO analysis backing him up fresh on everyone’s minds

    Economist Yves Smith, for example, long a critique of bad bank behavior and federal unwillingness to stand up to it, argues that Watt may be a little too beholden to Bank of America, that he’s unlikely to be confirmed, and, more seriously, that the whole focus on beating up DeMarco is a distraction from the administration’s more serious bank-coddling practices, weak settlements, and reluctance to anger Wall Street.

    I found it incredible that the wolf is watching the sheep. The banks, that caused this mess, via their frenzied market trading for Mortgage back Securities had loose underwriting standards, and there was a demand on Wall Street for this new type of security product. So lending standards went out the window. Therefore, since loans were sold as son as they were made, and banks switched roles from lender to servicer almost immediately, and got paid 1 to 1.5 times the face value of the loan, with zero of the risk, they made horrible loans. These same banks are now in charge of loan modifications, when it was proven that they dual track borrowers and are pursuing legal action, in parallel with supposedly working with borrowers on meaningful loan modification. That’s talking out of both sides of your mouth: I intend to take you to court, but I will pretend to help you via loan modification, that sometimes takes 1 year or more while they are scrambling to fight mortgage NOTES that in reality, they no longer really own. Therefore, let’s spin up fraud, and hire companies like DocX LLC to re-create fictitious witness of signatures that never were witnessed and let’s robo-sign to death homeowners out their homes!

    Even if you’re not an underwater homeowner, this pertains to you because American taxpayers — through the government’s conservatorship of Fannie Mae and Freddie Mac — own or guarantee roughly 60% of the outstanding mortgages in America. So if proponents of principal reduction are correct, implementing such a plan through Fannie and Freddie would save taxpayers money, help out struggling homeowners, and stimulate the broader economy.

    However, if the argument is “moral hazard” this is hogwash. Was it not Moral Hazard that allowed banks to create sub-prime loans, to unqualified borrowers, knowing very well that they would default anyhow?!! As soon as the bank make the loan, they got cashed out, and switched roles from Lender to Servicer, with none of their own money any longer at stake. In most cases they got paid 1.5 times the loan value. So a mortgage for $300,000 was sold at $450,000. On top of which , if banks that originated the loans were forced to keep them, they had to keep 3 times the loan value in reserve, i.e: $900,000 in cash for every $300,000 mortgage they made. But by immediately selling the loans, they parked the risk with somebody else, and none of their own capital, or cash reserves, for liquidity was at stake anymore.

    Furthermore, banks that originated loans, once these loans were packaged and bundled together, as a Pool, these pool of loans were then sold into Real Estate Investment Trust Corporations. Once mortgage NOTES, a banking instrument and govened by the Banking Commission were converted into Mortgage Backed Securities, they then became stocks and thus governed by the SEC, the Securities and Exchange Commission. At that point, as a stock, the banks could then hedge their bets, and sell Credit Default Swaps, against the very same borrowers that they lent money to in the first place! So the bank can’t lose! None of their own skin is in the game, none of their own risk is with them, and in fact, the only risk is on the investors that bought Mortgage Backed Bonds, and the alternative group of investors that bought Credit Default Swaps. These banksters essentially took a local product: real estate, and nationalized by converting into stocks. However, unlike stocks, where thousands can be sold at the click of a mouse, you can’t do that with housing.

    Thus, the first wave of foreclosures hit: the subprime borrowers. As the investors that bougth mortgage backed securities cried FOUL, and rightfuly so, capital dried up and they stopped buying this junk. This led to a lack of capital and thus, this led to shrinking of the economy and job losses, and this then led to an economy with less people employed and with no capital for borrowers, no ability for sellers to sell if buyers couldn’t buy and a home far in excess of its loan value. This left millions of people upside down on a mortgage they could no longer afford and a house they couldn’t sell as their income shrunk when the capital markets collapsed. This then led to the second wave of foreclosures: the normal borowers.

    There is simply no point in owning security instruments (mortgage NOTES) far in excess of their actual value. We already bailed out the banks to the tune of $1.2 Trillion. These underserving banksters already got their bail out money and are not LENDING it, making impossible to qualify for lending standards, further causing the economy to stall. Principal write down ACROSS THE BOARD, is the only fair way. They got their bail out, where is OUR middle class bail out? Those that would argue that you signed an agreemetn to pay and nothing changes that, I would argue, true, but the banks are in the business of evaluation risk and risk based lending: the average consumer is not. They KNEW what they were doing!!

    Principal write down at an equal percentage across the board is the only fair solution. The banks stole people’s houses with the robosigning scandal. Where was my bail out? Where was yours? Time to equalize the playing field. (The exception should be subprime borrowers where traditional methods of interest rate reduction should be tried first and the negative equity should be put into a forebearance account for 5 years. If they pay perfectly for 5 years, it is forgiven, but if not, it’s still owed. ) For those home-owners not in default, it should be up front principal reduction , Principal forgiveness, rather than forebearance.

    It will be a great thing to celebrate to win principal reduction on Fannie and Freddie loans. But whoever does or doesn’t replace Ed DeMarco as head of FHFA, we’re going to need to keep a more complicated and deep critique of banking and housing policy alive

  9. Kathi says:

    At 62, I’m tired of working my butt off to pay my bills, pay my mortgage, and pay on time, take care of my house,and pay my taxes. Is there anyone out there to help me so I’m not struggling so much? Rhetorical question–I already know the answer. I can’t get a loan mod because I’m not behind. I went to an emortgage company to refinance and after a $3000 closing they sent my mortgage back to my original bank that refused me a loan mod. Something not right about that, but people can be behind on a few payments, have lousy credit, and get a loan mod for little or nothing. Something not right about this system, whatever it is.

  10. wayne says:

    We all know that the banks with their greedy CEOs are responsible for our disaster, yes, maybe some of the homeowners were responsible too.
    The BANKS should lower the morgage rates and modify loans to the depreciated value that they caused on these homes. Below is a win, win
    sugestion.
    Here is an axiom that should encourage the goverment to go by: “WHAT’S GOOD FOR THE PEOPLE, IS ALWAYS GOOD FOR BUSINESS, BUT, WHAT’S GOOD FOR
    BUSINESS IS NOT GOOD AWAYS GOOD THE PEOPLE.” Instead of giving all that money to Wall Sreet, it should have gone to the PEOPLE to help pay off their motgages, buy new cars, put money aside their kids in the BANKS, do lots of shoping and put money into their savings. All this would help the economy, bailout the BAnks, the AUTO IDUSTRY an the whole darn COUNTRY. Once the inhabitan are happy, evrybody is happy.

  11. Bruce Beckman says:

    Why doesn’t Freddie and Fanny offer 40 or 50 year payment plans to those under water and allow them to add the amount they are behind, if they are behind, to the principal? This, with the reduced interest rates of today, would allow many more people to stay in their homes and would not cost the tax payer to cover any losses.

    Perhaps this solution seams too simple for a Federal Government Agency to consider.

  12. Wayne English says:

    We Bailed out the Banksters, read all the above replies. Now it is the Gov. and Banks turn to Bail out the Taxpayers & those “Underwater” as a proper balance for the ills the Banksters preyed upon the US Citizens who 1. Lost their homes to foreclosure and 2. Are “underwater” because of action of the Banksters.

    However, Politicians are beholden to the Banksters, because they are under their thumb of “Too Big to Fail”. Banksters are telling the US Gov. how they want to remedy the situation without lowering principle payments to those “underwater” since they are because they refuse to bail out those taxpayers that bailed them out in the first place – THIS IS SIMPLY GREED that has overrun our Political system throughout both Democrats and Republicans. The Rich Banksters (& CEO’s or Monopolies) are in charge here, wanting to rule everything, including buying the Politicians to work their remedies by paying the politicians through Special Interest Lobbyists.

    The American People have lost control and are out of their league when it comes to Politicians who are seeking to profit and increase their bottom line at everyone’s elses expense.

    We have the technology today for the US Citizens to make their voice heard and to vote against the power plays of Banksters, Politicians and Monopolies (BPM) by offering the Peoples vote via Internet.

    But the BPM has everyone so busy working 2 jobs to make ends meet with all the extra time required to stay on top of bills, red-tape, etc. that few of us have the time to fight this unfair system that has been created by BPM GREED.

    Create a system where the US Citizens grade BPM and tax those companies that serve the GREED over the Solutions to make SERVICE to the American Public the highest priority in ALL SITUATIONS! FIX OUR BROKEN SYSTEM! Keep the Schools closed after 2-3PM so that Students and Education to not become a source of FULL TIME education that ought to be the cornerstone of Family Life in this USA, where additional classes are available on “How to Live” to train citizens to be more involved and work towards BPM who SERVE THE PEOPLE instead of Serving their OWN GREEDY Pocketbooks.

    Those 1-2% who have the capability to pay back to those who put them in power in the 1st place, by Serving the US Citizens and creating programs and education to uplift society for the benefit of all mankind.
    And to open schools where volunteers, gangs, ex-prisoners can attend full time schools that are open 24 hours/day as meeting ground for Education as the Cornerstone of Society constantly seeking solutions to problems that are created by GREEDY PPM’s.

    The time is now for our Politicians to represent the American People, give up beholding to Special Interest, and make the necessary radical changes to overcome this tendency for those in Power to represent themselves over the public, thereby equalizing the field to having a National System for Public to vote over Internet for ALL SERIOUS MATTERS that BPM’s have to increase their bottom line at everyone elses expense, thus creating this 99% versus 1% inequality. A Universal Balancing system is in order; Remember Alan Watts once suggested that the rich would payback the 99% via credit cards to absolve the inequity.

    I wrote this rather quickly, and I am sure there are some evident changes, but I hope this gets the real message across to those who are paving the way to a solution to balance this 1% vrs 99% INEQUITY!
    S
    R

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