Friday, March 16, 2012

Flaws in FHFA’s analysis of principal reductions

by Sarah Jawaid, National Housing Conference

Amherst Securities Senior Managing Director Laurie Goodman came before a Senate banking subcommittee hearing March 15 testifying that the Federal Housing Finance Agency used flawed analysis to substantiate its opposition to principal reductions. Goodman’s stated goal in testifying before the committee was to “discuss three actions that [could] strengthen the mortgage market, at no or minimal cost to taxpayers: increasing reliance on principal reduction modifications; a ramp up of the bulk sales program, coupled with financing for these properties; and a careful vetting of new rules that affect already tight credit availability.”

Goodman discussed that the analysis used by FHFA did not differentiate between loans with and without mortgage insurance. She gave the example: “if a borrower holds a $100,000 mortgage on a house worth $75,000, the mortgage insurer would cover any loss down to $70,000. If the GSE reduces the loan amount down to $80,000 and the borrower redefaults—though redefault rates on principal reduction mods are roughly 25%—the GSE loses the $20,000 given up. The insurer would then pay the GSE $10,000—the difference between the new loan balance of $80,000 down to $70,000 covered—and the resulting REO is only sold for $70,000, the GSE still loses the $20,000 it gave up in principal reduction and the insurer is off the hook.”

In addition, FHFA used state-level home prices instead of metropolitan statistical level prices and this ended up not capturing the accurate amount of borrowers in negative equity. "We would urge the FHFA to re-run their results, using the new model which incorporates the triple incentives [by the Treasury Department], correcting the technical flaws in their analysis, and breaking out loans with and without mortgage insurance separately," Goodman said in her written testimony. "We believe when this is done, it will be clear that forgiveness is the better solution for the bulk of the two-thirds of their book of business without mortgage insurance." Read more in HousingWire’s coverage and in Goodman’s testimony.

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