Principal Forgiveness

Fannie Mae and Freddie Mac have an array of tools to assist underwater borrowers.

Principal forgiveness in the context of Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA) is focused on assisting borrowers who are delinquent or in danger of imminent default.

The primary focus of Fannie Mae’s and Freddie Mac's (Enterprises) modification programs are to provide borrowers the opportunity to obtain an affordable mortgage payment for borrowers who have the ability and willingness to make a monthly mortgage payment.  If a borrower does not qualify for HAMP modification, Fannie Mae and Freddie Mac then look to employ a proprietary modification.

In January 2012 in response to a Congressional request, we publicly disclosed the analysis - Fannie Mae's Analysis Regarding Principal Forgiveness and Treasury's HAMP Principal Reduction Alternative (HAMP PRA) Program and Estimates of Economic and Operational Effects of Increased HAMP Principal Reduction Incentives on Freddie Mac - that led FHFA to exclude principal forgiveness from its menu of loss mitigation tools.

The announcement included a Letter to​ Congress explaining that FHFA serves as conservator and regulator of the Enterprises under three principal mandates set forth by Congress that direct our activities and decisions, as follows:

1. FHFA has a statutory responsibility as conservator to preserve and conserve the assets and property of the regulated entities.
2. The Enterprises continue to have the same mission and obligations as before conservatorship.  FHFA must ensure that
Fannie Mae and Freddie Mac maintain liquidity in the housing market during economic turbulence.
3. Under the Emergency Economic Stabilization Act of 2008 (EESA), FHFA has a statutory responsibility to maximize assistance for homeowners to minimize foreclosures.  Under EESA, FHFA must consider the net present value of any action undertaken to prevent foreclosures.

These mandates guide every FHFA policy decision, including our decision not to allow Fannie Mae and Freddie Mac to engage in principal forgiveness.

In considering principal forgiveness, we compared tax-payer losses from principal forgiveness versus principal forbearance, which is an alternate approach the Enterprises currently take.  We concluded principal forgiveness results in a lower net present value than principal forbearance.
Remarks of Edward J. DeMarco, Acting Director, Federal Housing Finance Agency, Before the Brookings Institution, Washington , D.C., "Addressing the Weak Housing Market: Is Principal Reduction the Answer?"  

Benefits do not Outweigh Costs

In July 2012 Statement by Edward J. DeMarco, Acting Director, Federal Housing Finance Agency, on the Use of Principal Forgiveness by Fannie Mae and Freddie Mac, FHFA announced that after extensive analysis of the revised Home Affordable Modification Program Principal Reduction Alternative, including the determination by the Treasury Department to begin using Troubled Asset Relief Program monies to make incentive payments to Fannie Mae and Freddie Mac, we concluded the anticipated benefits do not outweigh the costs and risks.  We concluded the HAMP alternative program did not clearly increase foreclosure avoidance while reducing costs to taxpayers relative to the approaches currently in place.

FHFA continues to focus on loss mitigation and foreclosure alternatives through a variety of means - Review of Options Available for Underwater Borrowers and Principal Forgiveness and Appendix to FHFA Review of Options.  Through HAMP and the standard modification now available through the Servicing Alignment Initiative, delinquent borrowers and borrowers at risk of default will be reviewed for loan modifications that can include principal forbearance.  Borrowers who remain current on their loan payments and have mortgages that were originated on or before May 31, 2009 can take advantage of the recent changes to HARP, which now permits all current underwater borrowers to refinance into lower interest rate mortgages.