WASHINGTON – CUNA urged the regulator for Fannie Mae and Freddie Mac today to rethink a proposal to allow the two mortgage giants to forgive principal on at-risk mortgages because of the effects the program would have on the broader mortgage market by encouraging borrowers to enter into strategic defaults in order to pressure their credit unions into similar loan forgiveness.
CUNA President Bill Cheney told Ed DeMarco, director of the Federal Housing Finance Agency the spillover effects could be disastrous for credit unions and other lenders, even if the immediate impact would be limited to the two government sponsored enterprises, Fannie and Freddie.
“Specifically, CUNA is concerned that if FHFA were to implement a principal forgiveness program, some (or many) of the underwater borrowers without Enterprise-backed mortgages would seek similar principal forgiveness packages from their lenders or servicers,” said Cheney in a letter to the Fannie and Freddie regulator.
“CUNA shares FHFA’s concerns regarding the possibility that such a program would incentivize borrowers to strategically default in order to obtain principal forgiveness,” Cheney wrote. “However, since many borrowers do not know whether their loans are Enterprise-backed, an FHFA program may have a domino effect leading to strategic defaults outside of the body of mortgages backed by the Enterprises. These borrowers may not find out whether their loans are eligible for an FHFA principal forgiveness package until well after they have defaulted, which could potentially force a private lender into agreeing to forgive principal – even though such lender would technically not be subject to FHFA’s program.”
Cheney also worried that borrowers without Fannie or Freddie-backed mortgages that have not defaulted may pursue principal forgiveness from their lenders simply because their neighbor benefited from the FHFA program.
Cheney’s worries were expressed just days after DeMarco said in a speech his agency is considering reversing its long-held position and offering at-risk borrowers principal forgiveness in order to help more homeowners stay in their homes and keep the mortgages current, even at the cost of reducing mortgage payments to Fannie and Freddie.
“Even though an FHFA-sponsored principal forgiveness program would not directly affect credit unions’ balance sheets, if such a program spills over into the private sector, CUNA is concerned that it could have a significant negative impact on credit unions with regard to the loans held in portfolio,” cautioned Cheney.
