Posted on Friday, December 10, 2010
The top federal agencies responsible for setting housing policy are clashing over a new program designed to help borrowers whose homes are worth less than they owe on their mortgages, according to industry and government sources.
The Federal Housing Administration says the program could avert foreclosures, but the Federal Housing Finance Agency has concerns that the program, if expanded to include the government-controlled mortgage giants Fannie Mae and Freddie Mac, could be a logistical nightmare that would cost taxpayers too much, the sources said.
About one in four borrowers is underwater. Without equity in their homes, these borrowers tend to be vulnerable to foreclosure because it is difficult for them to refinance or sell their homes. Housing advocates have said that helping these borrowers is important to stem the nation's foreclosure tide.
At issue is an FHA program launched in September that would allow some underwater borrowers who are current on their mortgages to refinance into more-affordable loans with a smaller loan balance and lower interest rate.
The agency, which answers to President Obama, says the program is an intelligent approach to avoid foreclosures among borrowers whose homes have substantially declined in value.
But without the participation of Fannie Mae and Freddie Mac, which control more than half of the mortgage market, analysts say the FHA's program is likely to have little impact on the depressed housing market.
In an interview, FHA Commissioner David H. Stevens said that any major mortgage company that refused to consider taking part in the FHA program would be "short-sighted" and that he would be "concerned if Fannie and Freddie are resisting it."
But the other regulator, the FHFA, which oversees Fannie Mae and Freddie Mac, has so far resisted the program because it could cost the companies, increasing their losses.
This second agency, which is independent of the Obama administration, is charged with minimizing losses at the companies. Taxpayers, through the Treasury Department, are on the line for covering these losses. The companies have already cost taxpayers more than $130 billion.
Analyses by Fannie Mae and Freddie Mac have raised concerns about the losses they might incur as part of the program, and the companies questioned whether it would help enough people to justify the administrative costs, an administration official said.
The FHFA declined to comment. A Treasury official said the department would like the FHFA to allow Fannie Mae and Freddie Mac to participate in the program but cannot force the hand of that agency.
The clash between the two federal agencies reflects a continuing debate over how far Fannie Mae and Freddie Mac should go to help the housing market - and at what expense. The effort to enroll the companies in the FHA program was first reported by the Wall Street Journal.
Sen. Richard C. Shelby (Ala.), the top Republican on the Senate banking committee, raised concerns about the program Thursday at a hearing on Obama's nominee to head the FHFA, North Carolina's banking commissioner, Joseph Smith. Shelby was concerned that reducing the loan balance on mortgages owned by Fannie Mae and Freddie Mac would cost taxpayers.
"While underwater homeowners could benefit from principal write-downs, financing the write-downs through additional losses imposed on taxpayers amounts to a redistribution from taxpayers in general to certain classes of homeowners," Shelby said.
In response to questioning from Shelby, Smith said his top priority would be protecting taxpayers while weighing the advice of other agencies.
He did not directly address the FHA program.
Under the FHA plan, the administration is offering financial incentives to lenders to cut the loan balances of underwater homeowners who are current on their mortgages. The borrowers can then apply to refinance into a more affordable loan insured by the FHA. The borrowers would qualify only if the lender or investor who owns their existing mortgage agrees to reduce the amount owed on that loan by at least 10 percent.
Since its rollout in September, the program has helped three borrowers, the agency said.
"Complex programs like this take time to implement and take time to get adoption broadly in the markets," said Stevens, the FHA commissioner. "In order to gain wide adoption, you need market leaders to implement them where they make sense."
Guy Cecala, publisher of Inside Mortgage Finance, said Fannie Mae and Freddie Mac's participation in the program would give it a boost but also mean larger and more immediate losses for the two companies.
"It would mark a major public policy shift in how Fannie and Freddie are used to support the housing and mortgage markets," Cecala said.
Adam J. Levitin, a law professor at Georgetown University, said the FHFA may be hesitant because the two companies would be forced to give up some loans with above-market interest rates.
"So they get the cash when that 6 percent loan is refinanced, but what are they going to do with the cash? They probably won't be able to reinvest it into another 6 percent loan, because interest rates are lower now," he said. If that happens on a large scale, then Fannie Mae and Freddie Mac's losses will mount, making them more politically vulnerable as lawmakers continue pushing to eliminate them.
firstname.lastname@example.org email@example.com By Dina ElBoghdady and Zachary A. Goldfarb
Washington Post Staff Writers