It feels like 2008 all over again…
Attorney General Kamala Harris wants to put the brakes on most foreclosure sales in the state of California, according to a letter obtained by Bloomberg.
Apparently Harris sent a letter to Edward DeMarco last week, the acting director of the FHFA (which oversees Fannie Mae and Freddie Mac), asking that foreclosure sales be suspended while the agency determines if principal reductions are in the best interest of homeowners.
Long story short, DeMarco has been against offering principal reductions to distressed homeowners who hold Fannie and Freddie backed mortgages, mainly because of the cost burden to taxpayers, and also over concerns it may lead others to strategically default.
Principal Reductions Only Go to Those Behind on the Mortgage
You see, principal reductions probably wouldn’t be offered to homeowners unless they were behind on mortgage payments, and/or in the process of foreclosure.
This has led many to call the practice unfair, as it rewards the “irresponsible homeowners” and punishes those who keep up with their obligations.
However, the recently agreed upon National Mortgage Settlement includes $10 billion directed toward principal balance reductions (the lion’s share), which calls into question what should be offered to those with Fannie and Freddie backed loans.
That settlement doesn’t cover Fannie and Freddie loans, and is only good for mortgages tied to the nation’s five largest mortgage loan servicers, including Ally/GMAC, Bank of America, Chase, Citi, and Wells Fargo.
Harris pointed out in the letter that California has already secured a minimum of $12 billion in principal reductions from banks, and noted that they are the most meaningful solution for homeowners and most cost effective for investors.
Additionally, she said the FHFA’s data itself revealed that principal reductions would best serve taxpayer interests, who happen to be on the hook for Fannie and Freddie’s losses.
Are Principal Reductions the Answer?
A month or so ago, I actually argued against principal reductions on loan modifications (shocking I know). For the record, it’s not about politics.
I noted that the cost of refinancing high-cost mortgages to today’s ultra low mortgage rates is much cheaper compared to offering principal reductions, and more equitable.
It’s easier to swallow for other homeowners, including the underwater ones that aren’t behind on their mortgages but also need payment relief.
The lower rates alone can serve as a means to lower payments and keep borrowers in their homes. And also increase homeowner optimism.
Principal reductions, on the other hand, may just be a drop in the bucket for many California homeowners.
After all, data from way back in 2009 revealed that the average negative equity on foreclosed properties in the state was a staggering $200,000.
So if the average underwater homeowner receives $20,000 off their mortgage, will it have any meaningful impact? I doubt it.
The smaller principal reductions may work in other lower-cost regions of the nation, but in California, where home prices were/are sky-high, I doubt there will be enough money on hand to justify such a move.
Roughly 60 percent of the mortgages in the state of California are backed by Fannie Mae and Freddie Mac, so any action they take will be significant.