by Calculated Risk on 4/07/2012 08:17:00 PM

HUD Secretary Shaun Donovan will be on C-SPAN Sunday morning (see here).

Here are some comments on Fannie and Freddie principal reductions:

Q: Why should Fannie and Freddie be forced to do write-downs?

DONOVAN: This isn’t about force. This is about making the right decision for homeowners and for the taxpayer. We believe and there is a lot of agreement, many economists, those who have looked closely at this data who believe where you have someone who is deeply underwater, where you’re in a situation where there is really no light at the end of the tunnel, no sense that even if you’re paying your mortgage for three, four, five years or even a decade, that you’ll get back to building equity again. Families will give up at some point. We think the data shows that. Really the issue here is about the numbers and the analysis and whether this is not only good for homeowners but also good for the taxpayer. And we believe with the changes that we’ve made over the last few months that the case is compelling. And my experience with Ed DeMarco is whatever his personal feelings are, he is dedicated to making sure that he follows the law and what the conservator is required to do. And we believe based on the analysis that we’ve done that the evidence is that principal write-downs should happen in cases where it’s not only good for the homeowner but also good for the taxpayer.

Q: Three out of four deeply underwater borrowers with loans backed by Fannie and Freddie are paying. How concerned are you that some of those borrowers may stop paying if you offer debt reduction to borrowers who are delinquent?

DONOVAN: The vast majority of homeowners don’t operate that way. They know that their home is where they’re going to raise their kids. They’re part of a community there. The home is much more than an investment. And so we really know this from studies we’ve done, that the vast majority of folks, these families, aren’t going to just put all of that at risk to default on purpose on their homes.

And so what we’re really talking about is a small group of folks, maybe demographically single folks who aren’t giving up those same things, who see that there may be from defaulting that you know they could move across the street or other things. So there is a small group. But we shouldn’t punish the vast majority of folks where strategic default isn’t really a risk, just to fix what may be really a risk with a small percentage.

This isn’t that hard a problem to design around. Take the mortgage-servicing settlement that we recently reached. In that case what we’re doing is putting in place protections so that we avoid some of the risks of strategic default. For example, in that case many of the servicers are simply going to set a date at which you’re eligible based on delinquency and what that means is there’s nothing you can do. You can’t make yourself eligible. You can’t start to default on your mortgage and all of a sudden start to get a windfall from that by getting a principal reduction. And so while I understand the concerns about this, I think one the vast majority of homeowners are not at risk for strategic default. And two, even for those where there is some risk, there is a way to design it so that … it avoids those risks.

A few days ago, FHFA acting director Edward DeMarco said:

[W]e are currently evaluating the recent Treasury Department proposal to HAMP regarding principal forgiveness and expect a decision this month.

So a decision will probably be made very soon.

Earlier:
• Summary for Week Ending April 6th
• Schedule for Week of April 8th