FHA Short Refi: Fannie, Freddie must participate

by Karen Lawson
December 21st, 2010

Infighting between the Federal Housing Finance Agency (FHFA) and FHA could keep the FHA short refinance program from assisting homeowners with mortgage amounts exceeding the current value of their homes. CNBC reports that an inherent conflict of interest between rescuing underwater homeowners through the FHA short refinance program and the FHFA’s mission to protect taxpayers from losses while Fannie Mae and Freddie Mac are under its conservatorship. Fannie and Freddie own a majority of home loans in the US, and their participation in the FHA short refinance program would require their agreement to reduce mortgage balances for short refinance transactions by at least 10 percent. Yes, this would create losses for the two major investors in mortgage loans, but let’s consider the alternatives, which include:

  • Foreclosure: State law governs foreclosure procedures, but foreclosing a residential home loan can take as little as a few months to more than a year. During the process, mortgage companies carry non performing loans on their books while incurring foreclosure fees and costs, along with the cost of maintaining, repairing and selling homes that they’ve foreclosed. Delays in completing foreclosure occur when homeowners file bankruptcy or otherwise challenge a foreclosure suit. This can make estimating and managing foreclosure losses very difficult. Why not agree to a 10 percent write off and manage losses up-front?
  • Bankruptcy: Although bankruptcy courts typically require bankrupt homeowners to re-affirm their obligation to make mortgage payments, the process of repaying delinquent mortgage payments can take months or years, and necessitates hiring counsel for representing mortgage investors’ interests in court.
  • Vacant properties: Many homeowners abandon homes before foreclosure is completed, and may damage the home before vacating. Vacant homes are subject to vandalism and theft, and may attract criminal activity. Mortgage companies may be cited by local officials for public nuisances and code violations associated with foreclosed homes.
  • Cost of maintaining and selling foreclosed homes: Mortgage investors typically retain title to foreclosed conventional mortgage loans. This means that they must repair, market, and sell foreclosed homes. This involves hiring contractors, real estate agents, and maintenance workers.  No one can predict when vandalism may occur or emergency repairs may be needed. This makes estimating losses on foreclosed homes a guessing game at best.

FHA foreclosure losses not funded by taxpayers

FHA guidelines encourage mortgage lenders to work with distressed homeowners to prevent foreclosure, but when mortgage lenders incur losses related to defaulted FHA loans, FHA reimburses lenders from funds generated by payment of FHA mortgage insurance premiums by FHA borrowers.  FHA Commissioner David Stevens asserts that the FHA fund for reimbursing lenders is solvent and expected to remain so. In the case of short refinances, mortgage lenders would sustain the cost of  mortgage write downs, plus delinquent mortgage interest, and foreclosure costs if applicable.

Mortgage investors could reduce losses by approving FHA short refinances of delinquent loans rather than taking chances with lengthy and costly foreclosure and bankruptcy filings.

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2 Responses to “FHA Short Refi: Fannie, Freddie must participate”

  1. s2kreno Says:

    By forcing taxpayers (the de facto shareholders in Fannie and Freddie) to take losses to help out homeowners who have demonstrated that they can in fact afford their homes, you are transferring wealth out of the hands of one class of Americans (renters and those who did not over pay for property or cash out excess equity) and into homeowners who made unfortunate decisions. Where is the fairness? Why should people who rent and don’t get mortgage interest deductions and other home ownership subsidies have to dip further into their pockets to help out a class that is probably better off than they are? Bottom line is the short refi program is short sighted and should die.

  2. Gary Eckert Says:

    I think the your point about those that cashed out and spent the money is a good one. I wouldn’t like it if government money went to help these people. I think they just overextended themselves and are now paying the consequences. They were not victims of the housing bubble, unless there house is now worth much less than their original purchase price.

    However, many people, myself included, purchased homes in inflated areas (having not made a windfall profit on the sell of a previous home) and then saw the value cut in half. It is clear to me that the banks, ratings agencies, and even insurance companies created this mess by handing money out like it was candy to those who shouldn’t have been buying properties in the first place. They were reckless and irresponsible, concentrating on short term profits without concern for the sustainability of the house of cards they created.

    It is my belief that if the government had not stepped in and bailed out AIG, taken Fannie and Fredie back under its wing, and of course the banks, then perhaps the free hand that watches the market would be doing its job. Fannie and Freddie would have to write down principal on overvalued properties since AIG couldn’t necessarily pay 100 cents on the dollar for each foreclosure policy. At present, they would rather people like me just walk away and then foreclose since as I understand it they loose nothing (i.e. the government screwed things up worse by not putting strings and/or limitations on these bailouts).

    Even the responsible people like me that put 20% down, lost it all and now see the property value cut in half will eventually walk away if something isn’t done. It’s not unfortunate; it’s business!

    Gary Eckert
    Maui, HI

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