A new report has revealed that Fannie Mae and Freddie Mac are finally admitting that principal reductions for homeowners who are underwater actually work. Leading economists, government agencies, and leaders have been saying it all along: reducing the principal on homes that are worth less than their mortgages produces a positive financial benefit for homeowners, taxpayers, and the country as a whole. Ed DeMarco, head of the Federal Housing Finance Agency -- which oversees Fannie and Freddie -- has stood in the way of reductions and he's claimed the support of Fannie and Freddie. But that's no longer the case. Even Fannie and Freddie now support principal reductions. It's time for Ed DeMarco to step aside, and time for President Obama to step in and act on behalf of struggling Americans.
Response to Petition
By Brian Deese
Thank you for taking time to weigh in through the "We the People" petition process. The issue that you have highlighted -- how to help the struggling homeowners and a struggling housing market turn the corner to recovery -- is enormously important to the Administration, and your thoughtful position is greatly appreciated.
As you well know, millions of families owe more money on their home than it is worth, which puts considerable economic strain on many households. This is not only a problem for these families, but also for their communities and for the housing market as a whole.
So we have taken steps to ensure that principal reduction is a tool that is available to borrowers struggling with negative equity -- and that that tool is being used appropriately when it makes sense for borrowers, investors, and the taxpayer.
- We have tripled incentives for lenders to provide principal reduction through the Home Affordable Modification Program (HAMP), a program designed to help homeowners in distress modify their mortgages to more sustainable terms. While not appropriate in all circumstances, principal reduction modifications are an important tool in the overall effort to help homeowners achieve affordable and sustainable mortgages. By increasing these incentives, we are seeing a substantial increase in the number of program participants receiving principal reduction, with roughly two thirds of deeply underwater program participants now getting some principal reduction.
- We have also reached an historic settlement with the nation's largest lenders, and as part of this agreement, the lenders have committed to do no less than $10 billion of principal reduction on the loans they service.
- We have proposed legislation by which the Government-Sponsored Enterprise's (GSEs) and Federal Housing Administration would cover closing costs for borrowers who choose to use the proceeds from refinancing to pay down principal and rebuild equity in their homes. For the majority of underwater borrowers, this step alone will bring them back above water in less than five years.
In addition to these important measures, we have asked the Director of the Federal Housing Finance Agency to allow Fannie Mae and Freddie Mac to provide principal reduction through HAMP where it is in taxpayers' interest. Today, HAMP borrowers who have loans owned or guaranteed by Fannie Mae or Freddie Mac do not benefit from principal reduction loan modifications. To encourage the GSEs to offer this assistance to its underwater borrowers, the Treasury Department has notified the GSE's regulator, FHFA, that it will pay principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification. As is clear by the uptick in principal reduction modifications happening in HAMP currently, we believe strongly that expanding this program to GSE loans is in the interest of borrowers and the American taxpayer.
President Obama and his Administration have worked tirelessly to help responsible homeowners to stay in their homes. In addition to principal reduction efforts, several others are worth highlighting:
- We have overhauled the way in which lenders service loans for struggling homeowners, leading to millions of homeowners getting their mortgages modified, either through government or private sector modifications.
- We have opened the refinancing market up for those who would otherwise be stuck in high interest rate loans because they don't have enough equity in their homes to get a new loan. This has helped an additional one million families lower their monthly payments, saving each family thousands of dollars a year.
- We have provided a year of forbearance to unemployed homeowners struggling to pay their mortgages while they look for work.
While each of these steps has had a positive impact, more must be done. Too many families are still struggling and the recovery is still too fragile to turn our backs on the problem.
That's why President Obama is pushing for legislation that would make it possible for millions of responsible owners to easily refinance their loans to the current, historically low interest rates. You can learn more about this proposal here:
The bottom line is that we agree that more needs to be done to help families and the market recover and that principal reduction should be part of that solution. The President has said that for the housing market, "we need to do everything in our power to repair the damage and make responsible families whole again." And this is an important tool in that effort. We appreciate your engagement on this issue and ask that you continue to provide us your thoughts as we work together to help to turn the housing market around.
Brian Deese is Deputy Director of the National Economic Council