CAP Report Argues Shared Appreciation Strategy for GSEs
Posted under Resources on April 1, 2012
While many lenders and mortgage investors in the private sector have embraced principal reduction, America’s two biggest mortgage finance companies, Fannie Mae and Freddie Mac, have not. In fact the two mortgage giants, which own or guarantee more than 3 million underwater mortgages, are forbidden from lowering principal on their loans by their regulator, the Federal Housing Finance Agency, or FHFA. The report released today, Sharing the Pain and Gain in the Housing Market, explains why Fannie, Freddie, and FHFA should give their stance on principal reduction another thought.
The report proposes a principal reduction pilot program at Fannie and Freddie that uses so-called “shared appreciation” modifications, through which Fannie or Freddie agrees to write down principal on deeply underwater loans in exchange for a portion of the future appreciation on the home. The borrower has a reason to keep paying, while the lender benefits when home prices eventually stabilize and rebound. The proposed plan includes program rules that deter borrowers from defaulting on their loan just to get a reduction in principal, what some critics call the “moral hazard” problem.
The report explains principal reductions should not be available to everyone, and that consideration must be done on a loan-by-loan basis. At this point, there is not enough data available to determine when exactly principal reduction is the best option compared to other modifications such as interest rate modifications or principal deferral. Indeed, that is precisely the reason for a launching a targeted pilot program.
The report specifically cites a recent Shelterforce interview with Ocwen Financial CEO Ron Faris, who discussed the lender’s shared appreciation modification program.