if this happens i forsee social chaos as 10's of millions stategically default to get there share of the pie. it creates a total unfair system. i forsee a 10% 10 year bond
Fannie, Freddie Backstop May Foreshadow Mortgage Forgiveness Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Jody Shenn
Dec. 28 (Bloomberg) -- The U.S. Treasury Departmentâs expansion of its capital backstops for Fannie Mae and Freddie Mac may foreshadow a shift in the governmentâs mortgage- modification tactics, Keefe, Bruyette & Woods analysts said.
The Treasury announced Dec. 24 that the two mortgage- finance companies, which were seized by the U.S. almost 16 months ago, could tap an unlimited amount of capital for three years, up from as much as $200 billion each. The companiesâ needs would be unlikely to exceed the prior limits âeven in a stress case scenario,â Bose George and Jade Rahmani, the New York-based analysts, wrote in a report today.
âGiven this outlook, we believe that the main driver of this significant change is the flexibility it gives the government to take more aggressive action to support the housing market, including potentially going down the road of allowing some form of principal writedown,â the analysts wrote.
Under the Obama administrationâs Home Affordable modification program, loan servicers reduce borrowersâ payments to 31 percent of their pretax incomes through means starting with interest-rate cuts. The program, which is meant to curb soaring foreclosures, doesnât reduce the size of homeownersâ debt, even with more than one-fifth owing more than the value of their properties, according to Seattle-based Zillow.com.
Shifting to principal forgiveness to cure so-called negative equity that makes borrowers more likely to abandon loans whose payments they can afford may prove more costly for Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, by sparking âanother wave of delinquencies as people look at it as a rational choiceâ to default to seek the aid, George said in a telephone interview.
The larger backstop would be available to protect against the âmoral hazard issue,â he said.
Second Mortgages
A change in tactics in the U.S. modification program is needed as the âcurrent version has been a failure,â in part because of trouble in getting the necessary documents from homeowners, George said.
Dealing with second mortgages, which arenât owned by Fannie Mae and Freddie Mac, would be âessentialâ to any move to principal forgiveness, though âI donât know what the solution to that will be,â he said.
Through November, servicers had permanently modified 31,382 mortgages under the Home Affordable program, which was announced in February as targeting 3 million to 4 million loans, the Treasury said Dec. 10. A total of 728,000 of the modifications were under way.
Fannie Mae has tapped $60 billion of its lifeline so far and Freddie Mac has been provided with $51 billion.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
Last Updated: December 28, 2009 15:59 EST
Fannie, Freddie Backstop May Foreshadow Mortgage Forgiveness Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Jody Shenn
Dec. 28 (Bloomberg) -- The U.S. Treasury Departmentâs expansion of its capital backstops for Fannie Mae and Freddie Mac may foreshadow a shift in the governmentâs mortgage- modification tactics, Keefe, Bruyette & Woods analysts said.
The Treasury announced Dec. 24 that the two mortgage- finance companies, which were seized by the U.S. almost 16 months ago, could tap an unlimited amount of capital for three years, up from as much as $200 billion each. The companiesâ needs would be unlikely to exceed the prior limits âeven in a stress case scenario,â Bose George and Jade Rahmani, the New York-based analysts, wrote in a report today.
âGiven this outlook, we believe that the main driver of this significant change is the flexibility it gives the government to take more aggressive action to support the housing market, including potentially going down the road of allowing some form of principal writedown,â the analysts wrote.
Under the Obama administrationâs Home Affordable modification program, loan servicers reduce borrowersâ payments to 31 percent of their pretax incomes through means starting with interest-rate cuts. The program, which is meant to curb soaring foreclosures, doesnât reduce the size of homeownersâ debt, even with more than one-fifth owing more than the value of their properties, according to Seattle-based Zillow.com.
Shifting to principal forgiveness to cure so-called negative equity that makes borrowers more likely to abandon loans whose payments they can afford may prove more costly for Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, by sparking âanother wave of delinquencies as people look at it as a rational choiceâ to default to seek the aid, George said in a telephone interview.
The larger backstop would be available to protect against the âmoral hazard issue,â he said.
Second Mortgages
A change in tactics in the U.S. modification program is needed as the âcurrent version has been a failure,â in part because of trouble in getting the necessary documents from homeowners, George said.
Dealing with second mortgages, which arenât owned by Fannie Mae and Freddie Mac, would be âessentialâ to any move to principal forgiveness, though âI donât know what the solution to that will be,â he said.
Through November, servicers had permanently modified 31,382 mortgages under the Home Affordable program, which was announced in February as targeting 3 million to 4 million loans, the Treasury said Dec. 10. A total of 728,000 of the modifications were under way.
Fannie Mae has tapped $60 billion of its lifeline so far and Freddie Mac has been provided with $51 billion.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
Last Updated: December 28, 2009 15:59 EST
