Cramdowns shot down: another missed opportunity

This article critiques the Federal Housing Finance Agency’s decision not to recommend principal reductions for negative equityThe condition of a property owner owing more on a mortgage than the current fair market value of the encumbered property. mortgages held by Fannie MaeA government-sponsored entity operating in the secondary mortgage market. and Freddie Mac.

Too expensive for today’s taxpayer?

Although late by even Congressional standards, the Federal Housing Finance Agency (FHFA) has finally returned with a decision on their recent proposal for Fannie MaeA government-sponsored entity operating in the secondary mortgage market. and Freddie Mac (collectively dubbed FrannieA collective term for Fannie Mae and Freddie Mac.) to begin offering principal reductions (cramdowns) to underwater homeowners. [Click here for the full FHFA report.]

Citing a threat to FrannieA collective term for Fannie Mae and Freddie Mac.’s liquidity, the leaderless FHFA (read: congressional interference in appointments) concludes that cramdowns are not FrannieA collective term for Fannie Mae and Freddie Mac.’s best loss mitigationThe good-faith effort a landlord who seeks to recover future rents makes to reduce their loss of rent after a tenant vacates or is evicted. tool. Thus, the federal government has decided against allowing FrannieA collective term for Fannie Mae and Freddie Mac. to offer cramdowns. [For a report on the beginnings of the cramdownThe reduction of the principal balance of a loan. In first tuesday context, cramdowns are a tool used to provide debt relief for underwater homeowners. proposal, see the November 2011 first tuesday article, Cogitating cramdowns: a tale of suspense.]

The FHFA estimates that it would cost the Treasury nearly $100 billion to fund the capitalization needed to facilitate FrannieA collective term for Fannie Mae and Freddie Mac.’s discharge of the negative equityThe condition of a property owner owing more on a mortgage than the current fair market value of the encumbered property. associated with all of the mortgages in their portfolio. The benefits of instituting a cramdownThe reduction of the principal balance of a loan. In first tuesday context, cramdowns are a tool used to provide debt relief for underwater homeowners. program do not justify the cost to those in the U.S. who pay income taxes, according to FHFA Acting Director, Edward J. DeMarco.