May 14th, 2010
09:51 AM ET
13 years ago

Freddie and Fannie won't pay down your mortgage

NEW YORK ( - Pressure is mounting on loan servicers and investors to reduce troubled homeowners' loan balances...but the two largest owners of mortgages aren't getting the message.

Fannie Mae and Freddie Mac, which are controlled by the federal government, do not lower the principal on the loans they back, instead opting for interest rate reductions and term extensions when modifying loans.

But their stance is out of synch with the Obama administration, which is seeking to expand the use of principal writedowns. In late March, it announced servicers will be required to consider lowering balances in loan modifications.

And just who would tell Fannie and Freddie to start allowing principal reductions? The Obama administration.

Asked whether they will implement balance reductions, the companies and their regulator declined to comment. The Treasury Department also declined to comment.

What's holding them back is the companies' mandate to conserve their assets and limit their need for taxpayer-funded cash infusions, experts said. If Fannie and Freddie lower homeowners' loan balances, they are locking in losses because they have to write down the value of those mortgages. Essentially, that means using tax dollars to pay people's mortgages.

The housing crisis has already wreaked havoc on the pair's balance sheets. Between them, they have received $127 billion - and recently requested another $19 billion - from the Treasury Department since they were placed into conservatorship in September 2008, at the height of the financial crisis.

Housing experts, however, say it's time for Fannie and Freddie to start reducing principal. Treasury and the companies have already set aside $75 billion for foreclosure prevention, which can be spent on interest-rate
reductions or principal write downs.

"Treasury has to bite the bullet and get Fannie and Freddie to participate," said Alan White, a law professor at Valparaiso University. "It's all Treasury money one way or the other."

Though servicers are loathe to lower loan balances, a growing chorus of experts and advocates say it's the best way to stem the foreclosure crisis. Homeowners are more likely to walk away if they owe far more than the home is worth, regardless of whether the monthly payment is affordable. Nearly one in four borrowers in the U.S. are currently underwater.

"Principal reduction in the long run will lower the risk of redefault," said Vishwanath Tirupattur, a Morgan Stanley managing director and co-author of the firm's monthly report on the U.S. housing market. "It's the right thing to do."

Meanwhile, a growing number of loans backed by Fannie and Freddie are falling into default. Their delinquency rates are rising even faster than those
of subprime mortgages as the weak economy takes its toll on more credit-worthy homeowners. Fannie's default rate jumped to 5.47% at the end of March, up from 3.15% a year earlier, while Freddie's rose to 4.13%, up from 2.41%.

On top of that, the redefault rates on their modified loans are far worse than on those held by banks, according to federal regulators.

Some 59.5% of Fannie's loans and 57.3% of Freddie's loans were in default a year after modification, compared to 40% of bank-portfolio mortgages, according to a joint report from the Office of Thrift Supervision and Office of the Comptroller of the Currency. This is part because banks are reducing the principal on their own loans, experts said.

So, advocates argue, lowering loan balances now can actually save the companies - and taxpayers - money later.

"It can be a financial benefit to Fannie Mae and Freddie Mac and the taxpayer," said Edward Pinto, who was chief credit officer for Fannie in the late 1980s.

What might force the companies' hand is another Obama administration foreclosure prevention plan called the Hardest Hit Fund, which has charged 10 states to come up with innovative ways to help the unemployed and underwater.

Four states have proposed using their share of the $2.1 billion fund to pay off up to $50,000 of underwater homeowners' balances, but only if loan servicers and investors - including Fannie and Freddie - agree to match the writedowns. State officials are currently in negotiations with the pair.

"We remain optimistic that we can get a commitment from Fannie, Freddie and the banks to contribute to this strategy," said David Westcott, director of homeownership programs for the Florida Housing Finance Corp., which is spearheading the state's proposal.

Filed under: Obama administration
soundoff (22 Responses)
  1. John

    Write-downs should be used only incredibly sparingly and the net effect on a credit report should be close to or equivalent to bankruptcy. Yes, businesses in severe distress sometimes get banks to write off loans but they're tarnished severely for it and it's usually a tactical move to improve the chances of getting the rest of the money back. Forcing banks probably is not a good idea, but encouraging it as part of a way to stabilize loans (Ex. also lowering rates first or temporarily suspending payments for major medical or long-term documented job loss) may have some merit. Let the banks figure it out – but don't bail the banks any more than most homeowners and mostly as a last resort. The homeowners should want to repay the favor as quickly as the banks did.

    May 14, 2010 10:13 am at 10:13 am |
  2. Henry Miller, Libertarian

    Fannie Mae and Freddie Mac are already responsible for many billions of dollars of losses to the American taxpayer. No way they should be allowed to make that rip-off even worse!

    May 14, 2010 10:13 am at 10:13 am |
  3. jeff jackson, alabama

    Wierd how everybody has paid the
    price for the collaspe caused by
    Freddie and Fannie ( FRANK and DODD)
    but them .

    May 14, 2010 10:15 am at 10:15 am |
  4. TCM

    The entire Freddie and Fannie mess belongs to Pelosi, Reid, Dodd and Obama...they insisted, through strong arm tactics, on forcing lenders to give mortgages to low income make it "fair," and that they had a "Right," to have a home. Well, earning the money to afford the home is what's fair, and no one has a "right," to own a home; it's a desire. Their antics, along with Raines started the financial spiral that has caused havoc in markets around the world, crippling nations, to include ours. Liberals who still support these incompetent fools are truly misguided souls.

    May 14, 2010 10:17 am at 10:17 am |
  5. TCM

    individuals such as , "...Save America, impeach the treasonous republicans..." haven't a clue about the real world; as evident through repeated posts supporting this liberal anti-American administration. Anyone that's passed a finance 101 class in college can tell you that the Freddie and Fannie fiasco is crippling the nation financially. The best we can do to remedy this is vote out the liberals, from both sides, in November, and landslide Obama out of office in 2012, if this nation is still in one piece.

    May 14, 2010 10:21 am at 10:21 am |
  6. Ken

    That this disregard for existing contracts and centuries of law is even being discussed with a straight face in amazing. I have a great idea, I am going to run out and borrow money that I have no chance of paying back, enter into a legal contract on my own free will, and then have the government void the contract, reduce or eliminate the amount of money I have to pay back, and bankrupt the lender, all while robing the tax payer. This socialist liberalism is a disgrace, and is destined to end as all experiments in socialism end, with profound human misry and national collapse.

    May 14, 2010 10:23 am at 10:23 am |
  7. John Q.

    I think most of this is ridiculous. We bought our house based on what we could afford, not just qualify for, taking into consideration hard times, and/or temporary employment issues by one of us. It's a smaller house, but personal responsibility was in play. Looks like we should have just gone over-board on a larger house and let the government/tax-payer bail us out as well and come out ahead. What a load of baloney giving principle breaks for bad moves by people... let the chips fall where they may and end this big brother practices.

    May 14, 2010 10:24 am at 10:24 am |
  8. stevegee

    Fannie and Freddie should be abolished! They're nothing more than giant political tools used by the Franks and Dodds of Washington who try to control our economy. Yet all they've done is wreck it, thanks geniuses!

    The mortgage industry should go back to being a free market system - loans should be made to people who can afford to pay them back. The American Dream of owning a home is something you earn through hard work. And government has no business being in the mortgage business.

    May 14, 2010 10:25 am at 10:25 am |
  9. Rick in OP

    It would be interesting for you to do some reporting on the $5 trillion worth of liabilities from Fannie Mae and Freddie Mac that American taxpayers are on the hook for. It would also be a good idea to report on why Congress is ignoring the Fannie Mae/Freddie Mac debacle while supposedly concentrating on "financial reform".
    And by the way, did anyone notice that both Fannie Mae and Freddie Mac each asked for additional funding to cover recent losses approaching $10 billion dollars?
    Both Fannie Mae and Freddie Mac are good examples of the disaster that follows a government takeover of a function that is normally handled by the private market. They are a glimpse of the future of health care in this country.

    May 14, 2010 10:30 am at 10:30 am |
  10. Fair is Fair

    So the federal government runs Freddie and Fannie... and they want to use my tax money to pay other people's mortgages.


    I've had gainful employment since I wad 14 years old. And I'm sick and tired of working my butt off to pay for society's leeches.

    May 14, 2010 10:34 am at 10:34 am |
  11. Capt. Snarky

    Pretty soon Obama will be telling you when you can go to the bathroom....Jeez this guy is intrusive,..........

    May 14, 2010 10:40 am at 10:40 am |
  12. Lets expose Rush Limbaughs staff.

    The stench from these banks is almost as bad as Rush Limbaughs sack of lies.

    May 14, 2010 10:56 am at 10:56 am |
  13. Jefe

    I want a principal write-down as well, even though I'm not in trouble with my mortgage. Why should people who used home equity to fund vacations, vehicles, furniture, televisions, etc., get free money? I know not everyone did that, but many did. If people get free money for their investment, I want some as well. Its a terrible idea. The homes should be foreclosed on, and people who were smarter with their money should reap the rewards of being able to buy a home at a lower price.

    May 14, 2010 11:04 am at 11:04 am |
  14. rob

    "Treasury has to bite the bullet and get Fannie and Freddie to participate," said Alan White, a law professor at Valparaiso University. "It's all Treasury money one way or the other."

    What planet are thses people on? This situation is insane.

    Treasury is US!!!!!!! The taxpayer (All 45% who actually pay taxes) Fanny and freddy are now backed and owned by the federal Govt, US!!!!! They hold about 5 TRILLION worth of mortgages, but they are not on the fed ballance sheet. They are losing money every month by the Billions now as it is and Obama wants to order them to write down principal??????

    Our Govt. is running this country into the ground and they can't help themselves. God help us.

    May 14, 2010 11:05 am at 11:05 am |
  15. Ron in California

    Poeple buy houses they can't afford by lying about income or are unlucky and lose jobs. is tough. Now I have to pay through my tax dollars for some one who was not honest or unlucky?? I say NO!!!
    I worked, saved and pay my bills, if you can't that is your problem not mine. I know that doesn't sound charitable but enough already!

    May 14, 2010 11:10 am at 11:10 am |
  16. jp,michigan

    Just like every thing else the federal government tries to control , it too is a failure. The US postal serve is a failure and so will be the new health-care plan involving the federal government. History of the Obama administration is to continue to bailout those who can but won't help the American people. Our taxpayer money go in to these agencies and we cannot reap any reward for keeping them afloat!

    May 14, 2010 11:12 am at 11:12 am |
  17. harvey

    maybe credit card balance reduction will be next – run out and spend $20,000 on a home theater, then don't pay for it because the balance is forgiven. what about the people who faithfully pay their mortgages every month for 15, 20, or 30 years? what are you going to do for them?

    May 14, 2010 11:15 am at 11:15 am |
  18. Texas Granny

    BS!! I can understand lowering interest rates & extending the life of the loan (NOT that anybody has ever done that for me), but to just flat reduce the AMOUNT of the loan... BS!! You borrowed X number of dollars– you owe X number of dolalrs. Pay what you owe. I do.

    May 14, 2010 11:18 am at 11:18 am |
  19. Michael Wong

    Principal write-downs would just be another government handout. If the government is going to hand out debt-funded cheques to people, why not just give them to everyone? Why give them to the people who behaved most unwisely in the first place and got themselves in over their head during a speculative real-estate bubble?

    Nobody came to claw back their profits when the "buy and churn" strategy of home "investment" was working for them. Why do we come to help them when it failed? If we're going to help them now, there should at least be something done to discourage the "real estate as investment vehicle" strategy in future.

    May 14, 2010 11:18 am at 11:18 am |
  20. joe

    Why not force them to do what they are forcing big banks and lenders to do??? Why because Obama and all the rest of the Democrats want to subsidize all those who should not have loans made to them in the first place. Maybe Barney Frank can give them the money out of his pcoket since in 2004 he said there was nothing wrong with Fannie and Freddie. They are the major cause of the mortgage crisis.
    The reason they are having problem with defaults after refinances is the people are still not qualified. Theydid not qualify when the laon was first made and they did not qualify when they were refinanced. As someone who made mortgage loans for years, your fist loss is the best loss and they should all loss their homes becasue even with reducing priciple these people still do not qualify or be able to afford these home. Fix the problem once and for all. Either that or break fanni and freddie

    May 14, 2010 11:21 am at 11:21 am |
  21. Maria H-Miami

    First problem: Barney Frank – no one will go up against him and he does as he pleases, has for many years.

    Second problem: I remember Senator Obama promising to pay mortgages in trouble if he became President, now he's leaving it up to Fannie, Freddie and the States????

    May 14, 2010 11:29 am at 11:29 am |
  22. thor

    How can you break legal contracts that were signed by people that got in way over their heads? Can anyone tell me why Fannie and Freddie are left out of the financial reform bill that the dems are praising?Wake up people,it about the power to have control over people that's driving this administration.

    May 14, 2010 11:37 am at 11:37 am |