NEW YORK (MainStreet) — State attorneys general want banks and lenders to include mortgage principal write-downs in their loan modification programs, effectively reducing the amount of the home loan itself. But banks have already balked at the idea, and now they have a powerful ally in their camp: government-sponsored lending agency Freddie Mac (Stock Quote: FRE).
In March, JP Morgan Chase (Stock Quote: JPM) chief Jamie Dimon said that his bank wouldn’t offer write-downs to delinquent homeowners. “Principal write-down for people who could pay their mortgages? Yeah, that's off the table," Dimon said at a Chamber of Commerce event in Washington, DC.
It didn’t take long for Freddie Mac to sing the same tune. At a housing market symposium sponsored by industry researcher Housing Wire on May 13, Freddie Mac CEO Charles Haldeman told attendees that mortgage principal write-downs were a deal breaker for the housing giant.
Both Fannie and Freddie are in financial peril, with both government-sponsored enterprises (GSEs) currently in conservatorship and the American taxpayer forced to cover $150 billion in losses. But Fannie and Freddie own 90% of the current mortgage loan market so any decisions on mortgage write-downs coming from either GSE carries a great deal of weight.
In a February report to Congress, the White House said it wants to phase out Fannie Mae (Stock Quote: FNM) and Freddie Mac, but nothing has been etched in stone on that front.
Haldeman told the Housing Wire audience that the GSE wasn’t a good candidate for write-downs, primarily because its home loan delinquency rate is so small (at 3.5%). He did say that Freddie Mac would support some form of a mortgage loan “backstop” that would help keep delinquent, but otherwise financially viable homeowners in their houses. That, he added, would be a government-driven enterprise that wouldn’t require any input from the GSEs.
Some White House officials had reportedly put pressure on both Fannie and Freddie to include mortgage write-downs in their home loan assistance programs back in December 2010, but officials at both GSEs pushed back, noting that any losses incurred by adding mortgage write-downs would add to the already large financial burden carried by taxpayers.
So now Haldeman looks like he’s trying to make that policy official. The question now is, will state attorneys general – the individuals most responsible for putting the idea of mortgage write-downs for delinquent homeowners in play – let Fannie and Freddie off the hook?
No doubt, that’s the next act in the continuing housing market drama.
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