From the HW:
Bank analysts expect little change from Fannie Mae and Freddie Mac’s stance against reducing loan balances on underwater mortgages despite a news report that the Obama administration is urging them to do so.
The Wall Street Journal reported that the GSEs are being pressured to participate in the Federal Housing Administration’s short refinance program.
Participation so far has been weak, with only 61 applications in the first three months and only three processed, according to the WSJ.
The GSEs have been reluctant to reduce loan balances, especially for borrowers who are current on their payments, according to the Journal. “We believe this behavior is unlikely to change significantly for a number of reasons,” the Royal Bank of Scotland said in a commentary note:
“The basic underlying trust and pooling agreements for … pass-throughs dictate that current loans can’t be pulled out of the pool (except in rare cases where a current loan is considered to be in danger of imminent default.) This is one reason why GSE participation in the FHA short refinance program (which requires loans to be current) has been very low.”
The government-sponsored enterprises would take loans that are delinquent, process them through the Home Affordable Modification Program, and then when they are current, the GSEs would have the option of donig an FHA short refinance.
Analysts say that programs that “promote principal forgiveness could pose a moral hazard, which would be widely unpopular and thus met with strong resistance from many lawmakers.” RBS also said the GSEs will likely remain reluctant to approve principal modifications in cases where there is a second lien. In those cases, banks who hold the second liens must first take losses.