The official overseeing of the vast pool of mortgages held by Fannie Mae and Freddie Mac has defied the White House and more than 100 members of Congress for the second time by formally rejecting a plan to use bank bailout funds to write down principal balances for underwater homeowners.
On one side is the White House administration along with more than one hundred members of Congress, most of whom come from states hardest hit by the housing collapse argue that the plan will benefit homeowners and allow many to stay in their home and save tax money funds by reducing defaults on government guaranteed mortgages.
Edward DeMarco, the head of the Federal Housing Finance Agency is worried that write-downs could lead to more people defaulting on their loans and is unfair to those who are current on their loan terms.
DeMarco states that from the latest analysis from FHFA, the proposed plan is not enough to prevent foreclosure sin the future while opponents state that it would save a sizable amount in tax payer funds.
So what is the best option?
It should be no surprise that without relief, many more homeowners will continue to default or choose other options, such as a short sale or even deed-in-lieu. By offering assistance, many more will stay in their home, but does not provide any benefit for those who have been keeping current with their loans.
Perhaps some middle ground needs to be found, as there is no one-size fits all solution, especially with a situation of this size and depth.
As long as REO and short sales inventories rise, prices will remain stagnant. It would seem that offering mortgage write-downs seem the most logical to minimize the number of defaults from occurring. But then how do you prevent the possible added inventory of additional homeowners from defaulting to take advantage of a write down.
Incentives may be direct and if attractive enough, perhaps give homeowners who are current on their loans incentives to stay (in addition to keeping their credit history unaffected by a short sale or foreclosure). If money could be saved in the prevention of defaults, those savings in turn could be used to benefit those on time with their mortgages.
The end result would possible be a zero gain at best, or loss, which seems more realistic in potential tax savings, but with foreclosed inventory on the decline, it would help stabilize and promote healthier home prices, especially in markets that are dominated by distressed assets.