An eviction team removes furniture during a home foreclosure on September 21, 2011 in Longmont, Colorado. 
An eviction team removes furniture during a home foreclosure on September 21, 2011 in Longmont, Colorado.  - 
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The Federal Housing Finance Agency says it’ll help underwater homeowners who are behind on their payments and try to keep investors from blighting communities by dumping abandoned homes there.

For homeowners who financed their mortgages through Freddie or Fannie, who are significantly (more than 15 percent) underwater, and who are 90 days delinquent on their payments,  the agency will assist them in lowering their interest rates and reducing the principal owed. 

The program is designed “ to help clean up the remnants of the crisis,” said Columbia University professor Chris Mayer.  “When people get to 115 percent underwater, their willingness to make payments drops a lot, so the goal is to convert people who are severely underwater to moderately underwater,” he said.

Michael Calhoun, president of the Center for Responsible Lending, says the program isn’t a giveaway.

“It can reduce their principal down – and this is still leaving them in a challenging position.  But at least 15 percent is a number they can work with.”

In all, this would help 33,000 homeowners.  If that sounds like a small number, that’s because it is.

“There are six million homeowners who are under water,” said Calhoun.  But many of them did not finance their mortgages through Fannie or Freddie, and, critically, “many of them are making their payments on time,” he said.

Jim Parrott, a senior fellow at the Urban Institute, said the economy has improved the lot of homeowners who have held on this long. “Because the economy has improved over the last several years the number of delinquent borrowers has fallen off dramatically,” he said.

Such a program — of which both Calhoun and Parrott were in favor — was highly contentious in 2010. 

The then-administrator of the FHFA was concerned over moral hazard —the risk that in providing this sort of benefit you would encourage borrowers who could otherwise pay to go delinquent on their loan in order to receive the benefit. The FHFA has changed directors since that time.

In order to avoid the moral-hazard risk, the current program has a cutoff so that homeowners need to have already been delinquent by the time the program was announced in order to qualify. 

Ironically, this kind of program is exactly what many banks were already doing, said Calhoun.  Freddie and Fannie are playing catchup. 

The other arm of the FHFA’s plan involves investors. Freddie and Fannie sell non-performing loans to investors, and concern has mounted that such investors have been quick to foreclose on properties and then abandon them because the cost of repair is higher than the value of the home. “What FHFA has said to investors is that if you buy one of our pools of loans you have to be responsible and take care of and properly deal with these properties and make sure they’re not left there as a blight,” said the Center for Responsible Lending’s Michael Calhoun. “You can’t leave them in zombieland, where it’s a blight on neighborhood.” 

Timing of the program aside, it does provide a new and elaborated policy tool for the future.  “It is tool that is very useful to have pulled out of the toolbox finally,” said Parrott. “And hopefully it will remain out of the toolbox.”

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