WASHINGTON (4/13/12)--If the Federal Home Finance Administration (FHFA) proposes a mortgage principal forgiveness program, it should take into account any potential spillover effects such a program could have on private sector mortgage modifications, Credit Union National Association (CUNA) President/CEO Bill Cheney said in a letter to Edward DeMarco, acting FHFA director.
The letter follows remarks that De Marco made earlier this week before the Washington, D.C.-based think tank The Brookings Institution. In his speech, De Marco addressed a potential FHFA principal forgiveness program. Such a program would be limited to borrowers with GSE-backed mortgages, and the program would likely impact a fraction of the estimated 11 million underwater borrowers in the country today, De Marco said.
The acting FHFA head outlined his objections to allowing the GSEs to pursue a broad principal forgiveness program for troubled homeowners. "This is not about some huge difference-making program that will rescue the housing market," DeMarco said, adding that the debate over this type of relief is "about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers."
The anticipated benefit of principal forgiveness is that by reducing foreclosures relative to other modification types, losses would be lowered and housing prices would stabilize faster, producing broad market benefits, DeMarco said. However a larger group of underwater borrowers who have remained faithful to paying their mortgage obligations are a greater risk to housing markets and taxpayers, he added. Encouraging their continued success could have a greater positive impact on the recovery of housing markets, he said.
Cheney said CUNA agrees it is important for the FHFA to conduct a thorough up-front analysis of the possible effects of implementing any principal forgiveness program aimed at GSE-backed mortgages. However, he warned, such a program, if implemented, could lead to some of the underwater borrowers without GSE-backed mortgages to seek similar principal forgiveness packages from their lenders or servicers.
"CUNA shares FHFA's concerns regarding the possibility that such a program would incentivize borrowers to strategically default in order to obtain principal forgiveness," Cheney said, adding that an FHFA program may have a domino effect leading to strategic defaults outside of the body of mortgages backed by the GSEs.
In the letter, Cheney said credit unions have traditionally originated high quality mortgage loans with stringent underwriting standards, have had lower default rates than most banks during the recent economic crisis, and have been at the forefront of efforts to provide reasonable mortgage modifications to their members who are in distress. Many credit unions have also sold mortgages to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, but holding mortgages in portfolio is still a more common practice among credit unions than in other parts of the financial services sector, he added.
Even though an FHFA-sponsored principal forgiveness program would not directly affect credit unions' balance sheets, if such a program spills over into the private sector, CUNA is concerned that it could have a significant negative impact on credit unions with regard to the loans held in their portfolios, Cheney said.