Fannie Mae is wielding a bigger stick with troubled homeowners. So why won’t it try a bigger carrot?
The government-backed mortgage company said Wednesday that borrowers who default while they are able to pay won’t be able to get another Fannie Mae mortgage for seven years. The company said the stiffer terms would “encourage borrowers to work with their servicers and pursue alternatives to foreclosure.”
Fannie also threatened to sue homeowners who walk away from their mortgages in states where such deficiency judgments are permitted.
The moves come as falling house prices leave more homeowners under water on their loans, and weak employment and income trends are putting pressure on debt-soaked households. Officials fear a spate of walkaways could send house prices tumbling again, renewing pressure on the banking industry.
Meanwhile, those who do walk may have few alternatives, given the near total government control of the mortgage market now.
“We’re taking these steps to highlight the importance of working with your servicer,” Fannie exec Terence Edwards said in Wednesday’s press release.
Few would argue against these plans. Yet there are signs Fannie itself isn’t working closely enough to prevent foreclosures.
While the big banks led by Bank of America have begun reducing principal on troubled mortgages in certain instances in a bid to hold down foreclosures, there has been no sign that Fannie and its little brother Freddie Mac – which own or guarantee half of U.S. mortgages – are planning on doing the same.
CNNMoney’s Tami Luhby noted last month that Florida officials have been banging their heads against the wall, trying to get Fannie and Freddie to participate in a program that would reduce mortgage balances for underwater homeowners. Treasury was talking up just such a program Wednesday, called the Hardest Hit fund.
The argument for writing down principal balances is compelling. Fannie and Freddie aren’t about to go belly-up if their losses rise, given Treasury’s unlimited support for them. Without balance reductions, mortgage modifications are more likely to redefault in short order, rendering those efforts a waste of time.
But so far the companies have yet to commit to writedowns. Instead, they are discussing the matter.
“It’s important to remember that a number of the state agencies are working with Fannie Mae … on programs that include principal reductions,” Phyllis Caldwell, chief of the Treasury Homeownership Preservation Office, said in a conference call with reporters Wednesday. “At this point it’s important to talk to the servicers.”
Asked why Treasury, which owns 80% of the mortgage companies and has been funneling tens of billions of dollars to them, doesn’t simply tell Fannie and Freddie to do more principal reductions, Treasury had a familiar response.
Though the taxpayers are into Fannie and Freddie for $145 billion and counting, Treasury seems to see itself as having no leverage with the companies. It contends the real power, believe it or not, lies with the mandarins at the Federal Housing Finance Agency.
Herb Allison, the former Fannie CEO who now serves as assistant secretary of the Treasury for Financial Stability, said Fannie and Freddie “are not directly under Treasury’s control.”
All too often it seems like Fannie and Freddie aren’t under anybody’s control.