FHFA’s oscillating resistance to cramdowns

 “Halt foreclosures,” is the request of California’s Attorney General (AG) to Fannie Mae and Freddie Mac (collectively Frannie), until the Federal Housing Finance Agency (FHFA) completes a promised review of its no-cramdown policy for underwater homeowners.

The AG demanded “thorough, transparent analysis” of cramdowns as an option to prevent ever more foreclosures in California. This request follows the AG’s lawsuit still in progress over Frannie’s foreclosure policies.

Nationwide, one out of every five homeowners is underwater, resulting in $700 billion of negative equity. Frannie controls over 60% of California’s ailing mortgage market and is currently processing foreclosures on about 80,000 California homes.

Given the tremendous number of homes under Frannie’s control, the FHFA contends taxpayer costs resulting from Frannie cramdowns are too great. Some members of a House Committee have objected to the FHFA’s stance, contending cramdowns will ultimately save more taxpayer money than forbearance since most mortgage modifications currently underway will later default into foreclosure over the next four years of recovery.

The FHFA is still holding tight to its no-cramdown policy, but has recently seemed to give it a second, if skeptical, look.

first tuesday take: The politics of election season will adversely complicate these decisions with rhetoric, not reasoning, as demanded by the cacophonous minority egging on both sides of the congressional aisle. However, the FHFA can ignore the cry of reason for only so long.

Cramdowns are effective, feasible and humane, as the goal of homeowners, lenders and insurers is ultimately the same — avoid continuing the foreclosure plague. So far, four options have been proposed to solve California’s ailing real estate market: forebearance (modifications of the extend and pretend sort), foreclosure, shortsales or cramdowns.

Forebearance does not treat the core problem of negative equity, only symptoms of insupportable monthly payments. It is, therefore, an inadequate solution which misses the underlying insolvency disease (which Congress barred the bankruptcy courts from curing in 2005).

Foreclosure is a drain on lender finances, damages borrower credit and perpetuates the depression of the real estate market with empty REO properties.

Shortsales are slightly less debilitating than foreclosures, but still damage borrower credit and contribute to an unstable real estate market and lender-agent bickering over prices.

Thus, cramdowns remain the best option to eliminate negative equity damage.

Cramdowns effectively prevent foreclosures by cutting principal amounts to create a 94% to 100% loan-to-value (LTV) ratio. This debt ratio frees owners to sell their homes when necessary to relocate for jobs, health, education or family care.

Additionally, lenders suffer no greater profit loss through cramdowns than they do under a foreclosure or shortsale. These alternatives do nothing to increase a home’s selling price or reduce borrowers’ debt — the disparity created by negative equity.

Damaged credit? Avoided.

Empty houses? Gone.

Financial damage? Stopped.

Plus, the knowledge lenders can fondly congratulate themselves with: families allowed to remain in their homes as a national housing policy fulfilled, like making a new loan to a new buyer. This is a solution first tuesday has been pressing for years, and one which is increasingly drawing supporters despite the FHFA’s oscillating resistance.

Cramdowns are the only treatment which will restore California’s real estate market to health. The FHFA just needs to swallow the pill, and with the help of California’s AG that might just occur.


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