By Shahien Nasiripour in Washington
Reducing US borrowers? loan balances to the point where they have positive equity in their properties could cost taxpayers $100bn, a federal regulator has concluded.
Edward DeMarco, the acting director of the Federal Housing Finance Agency, said in a letter to congressional Democrats that the housing giants he oversees – mortgage financiers Fannie Mae and Freddie Mac – currently own or guarantee 3m so-called ?underwater? home loans, comprising 10 per cent of their borrowers. The estimate does not include second liens or home equity lines of credit.
About 80 per cent of borrowers with loans owned or backed by Fannie Mae and Freddie Mac are current on their mortgages, according to the FHFA, citing June 30 data.
Cutting the mortgage principal for all of Fannie Mae and Freddie Mac?s underwater borrowers to a 100 per cent loan-to-value ratio, at a cost of $100bn, would be far too expensive for taxpayers, Mr DeMarco wrote in his Friday letter, adding that he would be prohibited from taking such a step without congressional authorisation.
That estimate did not include the associated costs of training employees or upgrading the mortgage financiers? systems, which are ?outdated and inflexible?.
Mr DeMarco?s letter, made public on Monday, buttresses his long-held belief that cutting loan balances would cost taxpayers far more than the benefits conferred on Fannie Mae and Freddie Mac in the way of lower defaults.
It also comes as his agency faces increasing pressure to reduce loan balances to jump-start the sluggish US property market. Democrats in Congress, Obama administration officials and even Federal Reserve policymakers have stepped up their criticism of the FHFA, arguing that the agency?s policies are holding back the sluggish housing market.
Home prices are forecast to continue sliding over the next several months as more delinquent borrowers are set to have their homes repossessed.
About 11m US borrowers owe more on their housing debt than their homes are worth, for a total of roughly $700bn in negative equity.
The Fed earlier this month suggested that the FHFA should explore reducing borrowers? loan balances, given the overhang of negative equity and the slow housing recovery. William Dudley, president of the Federal Reserve Bank of New York, went a step further, arguing that if Fannie Mae and Freddie Mac cut mortgage principal, they would help the broader economy and minimise losses to taxpayers.
Ultimately, the FHFA did conclude that principal reduction could sometimes serve the long-term interest of taxpayers compared to foreclosure, Mr DeMarco said. FHFA data disclosed in his letter show that reducing borrowers? loan balances is far cheaper than not restructuring a borrower?s mortgage.
Mr DeMarco said that principal forbearance – a temporary reduction of mortgage principal – would be cheaper for taxpayers. But even then the savings would be marginal.
If Fannie Mae and Freddie Mac were to permanently forgive loan balances for their 1.4m borrowers with loan-to-value ratios greater than 115 per cent to bring them down to 115 per cent, it would cost $81.8bn. If the home loan financiers were to temporarily reduce those balances, it would cost $77.8bn.
? The Financial Times Limited 2012