One of the most frustrating parts of representing homeowners facing foreclosure over the past six years has been the steadfast refusal of the two biggest players in the mortgage marketplace, Fannie Mae and Freddie Mac, to allow for the reduction of principal on mortgages under their ownership or control.
Nearly 20% of American homeowners owe more to their mortgage holder than their home is worth. Underwater Loans, loans where the balance exceeds the value of the home, including loans that have been modified are at much greater risk of default than loans where the principal balance of the loan is less than the current market value of the home. This only makes sense. A homeowner with “skin in the game” is much more likely to make sacrifices necessary to make their mortgage payments under difficult circumstances than someone who has no realistic chance of ever recovering their investment.
An underwater homeowner often finds themselves one roof replacement or furnace repair away from having no reasonable choice but to default on their loan.
It has become clear to economists who have studied the matter and to those of us who work with distressed homeowners on the front lines that principal reduction loan modifications create outcomes with the best potential for success for both the homeowner and whoever is the ultimate recipient of the homeowner’s mortgage payments. There is clear empirical evidence that the “net present value” of a $100,000 loan modified to the present value of a $100,000 home is higher than the “net present value” of a $150,000 loan secured by a house worth $100,000 and far higher than the liquidation value of that $100,000 home through foreclosures.
It is indisputable that the correct business decision for Fannie Mae and Freddie Mac to do as most other owners of distressed mortgage loans have done and negotiate principal reduction loan modification with borrowers who are able to pay and who want to remain in their home. But the agency that was created to over see Fannie Mae and Freddie Mac, The Federal Housing Finance Agency (the “FHFA”) has maintained a strict policy against such modifications from the beginning of the housing crisis until now.
This has been a huge source of frustration for many clients of our firm. Too many of our clients have walked away from homes they loved, and could afford at market value because of this arbitrary policy that is as bad for Fannie Mae and Freddie Mac Shareholders and Bondholders as it is for the homeowners who have lost their homes.
There may be a small glimmer of hope on the horizon for homeowners who have underwater loans owned by Fannie Mae and Freddie Mac. Mel Watt, a former Congressman who was sworn in as the Director of the FHFA in January was an advocate of principal reduction as a Member of Congress and he has promised to take another look at the issue in his new role. This weekend the Washington Post reported that at least one family is being permitted to buy their home back after foreclosure at market value, and says that despite the delays that the policy remains under review.
This development makes it more important than ever for homeowners with Fannie Mae and Freddie Mac loans to fight to slow down foreclosure proceedings. There are often significant legal defenses that can be raised to both defeat and slow down foreclosure efforts that might put borrowers currently facing foreclosure in position to be among the first to negotiate a principal reduction loan modification with Fannie Mae and Freddie Mac.