In a speech (link) at the Brookings Institution on April 10, 2012, Edward DeMarco, the head of the Federal Housing Finance Agency that regulates state controlled lenders Fannie Mae and Freddie Mac, mentioned for the first time that it might consider a mortgage debt writedown program for certain underwater borrowers. The FHFA had resisted debt forgiveness on GSE loans in the past, arguing that it would increase FNMA’s and Freddie Mac losses. The two agencies hold or guarantee approximately 50 percent of outstanding home-loans in the US. Pressure for the FHFA to adopt debt forgiveness programs has been mounting as such programs may stabilize house-prices and bring about a normalization of the housing market faster than the current loan modification programs (see for example the Federal Reserve Report on the Housing Market and IMF’s new World Economic Outlook report 1-2012 Chapter 3 “Dealing With Household Debt” - and the Global Stability Report April 2011). Preliminary new analyses showing the potential positive effects of such programs on the agencies’ balance sheets because of the higher likelihood that borrowers in such programs will repay, and, importantly, anticipated increased incentives from the US Treasury have contributed to the change in FHFA’s position. The net cost of these programs to the US tax-payers was estimated at just over US$2billion, excluding offsetting benefits of positive market effects.
Direct IMF Link: http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf