Why Millions Won’t
Get Help From Big Mortgage Settlement
by Cora Currier | ProPublica
(Feb. 9, 2012) The Obama administration is billing today's $25 billion
agreement between most states and five banks that engaged in flawed or
deceptive practices as a big
win for struggling homeowners.
Most of the money in the settlement isn't a penalty, or a
fine levied on the banks. Instead, the biggest slice of the settlement will be
money banks put toward
principal reduction -— reducing the amount owed by struggling or underwater
borrowers. (Banks will also put smaller amounts toward refinancing and
other ways of helping people get back in control of spiraling debt.)
Getting a break on their mortgages could help the millions
of homeowners who owe more on their home than it is worth. But many of them
won't qualify — thanks to government-owned Fannie Mae and Freddie Mac.
The two mortgage companies, who were bailed out by the
government in 2008, were described by former Obama economic advisor Jared
Bernstein as "the
boulder" in the way of principal reduction. Their federal regulator,
the Federal Housing Finance Agency, is tasked with maximizing profits from the
companies — and thus minimizing taxpayer losses. The head of the agency, Edward
DeMarco, argues that allowing principal reductions would
result in a big loss for Fannie and Freddie and ultimately taxpayers.
The two companies aren't directly part of the settlement.
They don't service mortgages, or deal directly with borrowers. But Fannie and
Freddie do guarantee or own roughly half of the mortgages in the U.S. They also hold
more than 3 million of the nation's nearly
11 million underwater mortgages. Since Fannie and Freddie are backing the
loans — and are the ones who will take a loss if the mortgage isn't paid back
in full — they often have a veto on whether homeowners get a break.
Even if Bank of America, for example, services your
mortgage, you would not be eligible for principal reduction if Freddie or
Fannie back it.
Principal reduction is being pushed heavily by the Obama
administration as a way to lower the rate of foreclosures. The administration
recently tried to encourage Fannie and Freddie by offering to triple
incentives for principal reduction. So far, the companies and their federal
overseer, DeMarco, have declined to do so. An FHFA spokesperson said that the
agency is "not a party to the agreement. We await a copy of the agreement
to determine its implications."
Lowering the amount of money owed on a loan would result in
at least short-term losses for Fannie and Freddie, as well as to any other
investors in mortgages that are reduced. But many economists and analysts argue
and Freddie would ultimately benefit since such moves could help restore
the health of the housing market as a whole.
The reluctance by Fannie, Freddie and others to take on
principal reduction is partly why the administration's mortgage modification
been so ineffective.
The settlement does have potential benefits for future
borrowers, including new
protections and disclosures to prevent what Attorney General Eric Holder
practices" by the mortgage industry.
A small portion of the overall settlement — about $5 billion
— will amount to penalties for past abuses by the banks. Some of it will go to
state governments that were afflicted by banks' shoddy practices, and some of
it will go directly to about 750,000
homeowners who were foreclosed upon. If you lost your home, you could get up