The FHFA has been resisting calls for a principal reduction program, but a new study by the CBO has lent considerable heft to the policy’s corner.

It’s been an ongoing saga, one of Shakespearean proportions: will the FHFA ever endorse a policy of principal reduction?

For some time, the policy seemed a dead issue, one of many good-intentioned ideas drowned by political infighting in Washington. But now, principal reductions have received a huge boost from the Congressional Budget Office (CBO), which reported recently that principal reductions will save taxpayers $2.8 billion.

The Treasured Endorsement of the CBO

The CBO’s report is significant for two main reasons. First, $2.8 billion is a considerable sum of money; and second, the CBO has long held an important, almost mythical role in the partisan-fueled environment of Washington, operating as an entirely impartial judge on the fiscal impacts of the government’s various policies and budgets. In short, its reports are a big deal! Details of the CBO report included:

• The CBO analyzed principal reductions from a number of angles, looking at what impact reductions would have to 115, 100 and 90 percent LTV levels for underwater mortgage holders.
• The more aggressive the reduction in LTV, the CBO found, the greater the benefit to homeowners. A reduction to 90 percent, for instance, would decrease defaults from the expected 599,000 under current FHFA policy to 504,000, while a reduction to 100 percent would produce the aforementioned $2.8 billion in savings to taxpayers (the 90 percent policy would save approximately $2.2 billion).
• The CBO also made policy suggestions on how the FHFA should carry out a principal reduction program: “The most effective approach would be to offer principal forgiveness only to borrowers who were delinquent at the time the program was announced, thereby excluding borrowers who become delinquent in order to receive principal forgiveness,” the report stated, addressing what has long been the chief criticism of a principal reduction program, that homeowners would intentionally stop paying their mortgages to become qualified for reductions.

Also, the CBO mentioned that another possible policy would involve lenders granting principal reductions in exchange for partial equity in the homeowner’s property; one example the agency mentioned involved a 25-percent stake for lenders involving any increase in the home’s value.

Can it Be Done?

All of the CBO’s findings, though, inevitably lead to the one essential question in all this: will the government finally adopt a principal reduction policy?

As HousingWire reported, Elijah E. Cummings, a Democratic representative from Maryland and noted supporter of principal reductions, championed the CBO’s findings.

“Today’s report demonstrates that principal reduction programs are a win-win-win for our country — helping U.S. taxpayers, American homeowners and our nation’s economy all at the same time,” he said. “Rather than implement these programs years ago when their benefits were obvious, ideologues ignored this evidence and harmed our nation as a result.”

Yet, although Cummings is a ranking member of the House Committee on Oversight and Government Reform, the decision on principal reduction ultimately falls on the FHFA and its acting director, and Ed DeMarco, who currently heads the FHFA, has refused to adopt a principal reduction policy – though that may be a temporary problem. As we just reported, President Obama has nominated Mel Watt, a Democratic congressman from North Carolina, to head the FHFA, and should his nomination be approved, there’s a very strong chance that the government would approve a principal reduction policy.