by Calculated Risk on 3/26/2012 03:57:00 PM

From housing economist Tom Lawler:

Several media stories, including one from NPR/ProPublica, suggest that new analysis by folks at Fannie and Freddie indicate that engaging in some principal reduction modifications may be cost effective to the GSEs.

At least one of these stories, however, made what appears to be a “most erroneous” statement. E.g. a ProPublica reporter, in a follow-up article to the original NPR/ProPublica article on this issue, wrote that the GSE’s analysis suggested that “(s)uch loan forgiveness wouldn’t just help hundreds of thousands of families (stay) in their homes,” but “it would help save Freddie and Fannie money,” which “would help taxpayers…”

That latter statement, however, appears to be incorrect. Other reports, including an interview with Freddie’s CEO, indicate that the GSEs’ analysis finds that principal reductions would be “cost effective” for the GSEs ONLY after factoring in the new, turbo-charged incentives Treasury would pay to the GSEs (and other lenders/investors) for doing a principal reduction under HAMP. Such incentives -- which were recently tripled, and which the administration recently agreed would be paid to the GSEs as well as other HAMP participants (the GSEs didn’t use to get any HAMP incentives) – are obviously paid for by the government/taxpayers.

HousingWire reported on Friday, e.g., that Freddie CEO “Ed” Haldeman said the following at a symposium:

"I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us. We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments — which could be 50% of what you could write down — it may be in our economic self-interest to participate in that."

So here’s the “taxpayer” scoop: as best as I can tell, the GSEs’ analysis (which, to be fair, some have questioned) suggests that principal reductions would NOT make sense for them (or, implicitly, for taxpayers) without any Treasury/taxpayer incentive payments. However, IF the GSEs receive hefty incentive payments from Treasury/taxpayers to engage in principal reductions, then in some cases doing so WOULD make sense to the GSEs – but NOT to taxpayers!

CR Note: Hopefully the analysis will be released!