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FHFA Finds Principal Forgiveness Ineffective


Are you an underwater borrower? Freddie Mac and Fannie Mae have several tools that may be useful in these situations, one of which is known as principal forgiveness. In the context of Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA), the aim of principal forgiveness is to assist delinquent borrowers or those for whom default is imminent.

The modification programs offered by Freddie Mac and Fannie Mae provide eligible borrowers who are willing and able to make a monthly mortgage payment with opportunities to obtain an affordable monthly payment. Those who are not eligible for a modification under HAMP may seek relief with a proprietary modification.

In response to a request from Congress, the Federal Housing Finance Agency (FHFA) disclosed the analysis to the public that lead to the exclusion of principal forgiveness from its set of loss mitigation tools. In the announcement, the FHFA explained their role as conservator and regulator of Freddie Mac and Fanny Mae (the Enterprises) under three rules established by Congress directing its decisions and activities.

These mandates include:

1. The FHFA is responsible by law to conserve and preserve the asserts of the entities (conservatorship).

2. The obligations and missions of the Enterprises are the same as they were prior to the conservatorship, with the FHFA present to ensure that the Enterprises maintain liquidity in the housing market in times of economic trouble.

3. The FHFA is obligated by law to ensure that maximum assistance is provided to struggling homeowners to keep the foreclosure rate to a minimum.

This set of rules mandates every policy decision the Agency makes, including the decision now to allow the Enterprises to engage in principal forgiveness. After extensive analysis, the FHFA has found that the benefits of principal forgiveness do not outweigh its costs, and that principal forbearance (an alternate approach currently used by the Enterprises) is the better method. The analysis showed that the HAMP alternative program was an ineffective means of avoiding foreclosure while reducing taxpayer costs.

Borrowers who have remained current on their mortgage payments or who have loans originating prior to May 31, 2009 can benefit from recent changes to the Home Affordable Refinance Program (HARP). These changes will now allow all underwater borrowers to refinance their mortgages at lower interest rates.

Facing foreclosure on your home? Seek legal counsel at Atlas Consumer Law Call us at (312) 313-1613 to request a consultation.