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VARbuzz: FHFA used flawed analysis to argue against principal reduction

The Federal Housing Finance Agency’s argument against principal reduction is full of holes — that’s what a detailed analysis of the agency’s report discovered.

Principal reduction — reducing the amount a homeowner owes so he doesn’t have to end up in foreclosure — is gaining steam. (And why not? Corporations do it all the time.) One aspect of the $25 billion robo-signing settlement was that lenders would have to reduce the principal of borrowers.

But a big roadblock has been Ed DeMarco and the FHFA he runs — which oversees Fannie and Freddie. DeMarco has been steadfastly against any kind of principal reduction, preferring to let homeowners default and be foreclosed on.

His argument was based on an FHFA analysis that said that a wide-scale principal reduction program would end up costing taxpayers more, as well as increasing the risk of borrowers defaulting.

But Amherst Securities analyst (and senior managing director) Laurie Goodman wasn’t convinced, and the FHFA didn’t release enough details in its analysis. So she made phone calls and got the information.

And she found that the FHFA’s argument doesn’t hold water. Some problems with it:

  • It didn’t take into account whether loans had mortgage insurance.
  • It used broad, state-level values, not local ones.
  • It didn’t factor in HAMP incentives.
  • It used the credit information about borrowers when they took out the loan, not their current credit rating.

“We would urge the FHFA to re-run their results, using the new model which incorporates the triple incentives, correcting the technical flaws in their analysis, and breaking out loans with and without mortgage insurance separately,” Goodman said in her testimony to a Senate subcommittee.

Because doing the study the right way might show that the FHFA’s roadblocks are only stalling the recovery.