Alert August 07, 2012

FHFA Rejects Loan Forgiveness Option

The Federal Housing Finance Agency announced that it will not adopt HAMP with the principal reduction alternative as a loss mitigation tool for Fannie Mae and Freddie Mac.  In a report detailing its reasons for rejecting principal forgiveness, the FHFA concluded that existing loss mitigation efforts, including HARP and HAMP without principal forgiveness, provide sufficient opportunities for underwater borrowers.  The FHFA also concluded that if it were to adopt principal forgiveness for Fannie Mae and Freddie Mac, the impact of strategic defaulters and the operational costs of implementation would outweigh benefits.  The FHFA was also concerned with the long-term impact on mortgage credit availability if Fannie Mae and Freddie Mac allowed principal reduction.

Treasury Secretary Timothy Geithner criticized the FHFA’s decision, noting that an FHFA analysis showed that Fannie Mae and Freddie Mac participation in offering principal forgiveness would assist a half million homeowners, result in savings of $3.6 billion and save taxpayers $1 billion.