sharing the pain and gain in the housing market

8/2/2019 Sharing the Pain and Gain in the Housing Market

1/31www.americanprogress.o

Sharing the Pain and Gain in the

Housing MarketHow Fannie Mae and Freddie Mac Can Prevent Foreclosures

and Protect Taxpayers by Combining Principal Reductions

with Shared Appreciation

John Griith and Jordan Eizenga March 2012


2/31

Sharing the Pain and Gain

in the Housing MarketHow Fannie Mae and Freddie Mac Can Prevent

Foreclosures and Protect Taxpayers by CombiningPrincipal Reductions with Shared Appreciation

John Griith and Jordan Eizenga March 2012


3/31

Contents 1 Introduction and summary

5 The problem

10 The economic case or principal reduction

15 A solution: A shared-appreciation modiication

program at Fannie and Freddie

22 Conclusion

24 About the authors and acknowledgements

25 Endnotes


4/31

1 Center or American Progress | Sharing the Pain and Gain in the Hosing Maret

Introduction and summary

More han ve years ino wha is arguably he wors oreclosure crisis in American

hisory, millions o amilies are sill a serious risk o losing heir homes. Nearly

one in our homeowners is underwaer, meaning hey owe more on heir mor-

gage han heir home is worh,1 and more han 7 million homes are sill in he

oreclosure pipeline, according o analysis rom Morgan Sanley.2 In ac, some

analyss predic were only halway hrough he crisis.3

Te big quesion beore lenders, invesors, and policymakers oday is how o avoidanoher wave o cosly and economy-crushing oreclosures. Tere are several ways

o lower an a-risk borrowers monhly paymens and increase he chance o repay-

men: renancing o odays hisorically low ineres raes, exending he loans

erms, modiying he ineres rae, deerring paymens, or lowering he amoun

he borrower acually owes on he loanso-called principal reducion. In mos

cases he lender or morgage invesor responsible or he loan considers all o

hese opions when deciding which inervenion is bes or he specic borrower.

Ta is, unless he loan is owned or guaraneed by Fannie Mae or Freddie Mac, he

counrys wo bigges morgage nance companies. Fannie and Freddie have ye o

embrace one opionprincipal reducionas a viable oreclosure miigaion ool.

In ac he wo morgage gians, which are now operaing under governmen con-

servaorship, are orbidden rom lowering principal on any morgages hey own

or guaranee by heir regulaor, he Federal Housing Finance Agency, or FHFA.

Tas he case despie a growing consensus among economiss, invesors, aca-

demics, and consumer advocaes ha principal reducion is oen he mos cos-

eecive way o avoid unnecessary oreclosure or cerain groups o borrowers.

Principal reducions are paricularly eecive or deeply underwaer borrowers

ha are acing long-erm economic hardships, such as a permanen reducion in

wages or long-erm increases in unavoidable spending. Tese amilies are a high

risk o deaul and oen canno see he long-erm upside rom making expensive


5/31


monhly paymens ino a bad invesmen. Wih more equiy in heir home, hese

borrowers would be more likely o sick i ou in ough economic imes by making

deep cus o savings or oher areas o spending.

Tese are homeowners worh helping. Foreclosure is oen he wors-case scenario

or everyone involved, bu especially or underwaer borrowers who boas closeies o heir communiies and preer o say in heir homes. Tese kinds o home-

owners consider he adminisraive ees, consequences or heir uure credi, and

oher coss o oreclosure. So, oo, do he lenders or invesors, who oen have o

shell ou ens o housands o dollars in legal ees, oregone ineres, and losses on

he propery. And each oreclosure in he neighborhood decreases he value o

everyone elses home, which is a drag on he local housing marke.

Reducing principal is he only way o rebuild an underwaer borrowers equiy

while permanenly lowering monhly morgage paymens. Tas one reason why

almos one in ve modicaions o privae loans held in bank porolios involvessome principal reducion, according o one survey.4 Bu FHFA is no convinced

principal reducion is ever he bes opion or Fannie or Freddie.

o be air ha posiion may make sense i he goal o he agency is o proec

he shor-erm ineress o Fannie and Freddie. Principal reducions require he

lender o ake a hi on heir books oday in order o save more money omorrow

by reducing deauls and oreclosures. In he case o Fannie and Freddie, ha may

mean billions o more dollars in emporary suppor rom axpayers, who have

already invesed $150 billion in he companies since 2008.5

Bu is imporan o realize ha over he long run, he govermen-sponsored

enerprises are projeced o lose even more money i hey don ac oday. And

more han hree years ino he conservaorship, wih no clear pah or he ed-

eral governmen o wind down is conrol o Fannie and Freddie anyime soon,

we need o sar hinking long erm. Is ime or Fannie, Freddie, and FHFA o

give heir sance on principal reducion anoher hough. Tis repor explains

why Fannie, Freddie, and FHFA should embrace a argeed principal-reducion

program or cerain deeply underwaer loans i owns or guaranees. Tis is no a

mater o chariy, hough more sruggling homeowners would likely be able o sayin heir home as a resul. A is core, principal reducion is good business.

Indeed, we already know ha principal reducions are benecial o Fannie and

Freddie in he long erm. FHFAs own analysis shows ha reducing principal on all


6/31


deeply underwaer borrowers would save he governmen-sponsored enerprises and

he axpayers supporing hem approximaely $20 billion over he lie o hose loans

relaive o no doing anyhing.6 A careully designed principal-reducion program

one ha limis he long-erm risks borne by Fannie and Freddie and ocuses on bor-

rowers ha acually need a reducionmakes he business case even sronger.

o maximize reurns o Fannie and Freddie, we propose a pilo program ha

reduces principaloen by as litle as 5 percen or 10 percenwihou crea-

ing skewed incenives or borrowers. Trough so-called shared appreciaion

modicaions, Fannie or Freddie agrees o wrie down a porion o he principal

on deeply underwaer loans in exchange or a porion o he uure appreciaion

on he home. Te borrower has a reason o keep paying, while he lender benes

when home prices evenually sabilize and rebound.

Since he borrower has o give up a meaningul share o uure home price appre-

ciaion, basically esablishing a cos or program paricipaion, he shared appre-ciaion modicaion is no paricularly atracive o borrowers ha don need i.

And by phasing in he principal reducionsay, over he course o hree years

coningen on meeing every monhly paymenhe borrower has addiional

incenive o say curren on heir morgage. Boh o hese program rules deer

borrowers rom deauling on heir loan jus o ge a reducion in principal, wha

some criics call he moral hazard problem.

Ta said, we ully undersand ha principal reducions should no be available o

everyone. As is he case wih any loan modicaion, he principal reducion mus be

in he bes ineres o boh he borrower and he lender, or in many cases he morgage

invesor ha owns he loan. Tis consideraion mus be done on a loan-by-loan basis.

A his poin, we don have enough daa o deermine when exacly principal reduc-

ion is he bes opion or Fannie and Freddie compared o oher modicaions such

as ineres rae modicaions or principal deerral. Indeed, has he main reason or

a argeed pilo. For now we recommend Fannie and Freddie ocus on borrowers

ha are mos likely o bene rom a reducion, specically borrowers ha:

Have a morgage has worh a leas 115 percen o he homes curren valueAre eiher delinquen on heir morgage paymens or a imminen risk o deaul Face a long-erm economic hardship, such as a nonemporary decrease in

income or a permanen increase in unavoidable spending

To maximize

returns to Fanni

and Freddie, we

propose a pilot

program that

reduces princip

often by as little

as 5 percent or

percentwitho

creating skewed

incentives for

borrowers.


7/31


Do no have privae morgage insurance or a second lien, such as a home

equiy loan

o be sure, we believe ha principal reducion could be he bes modicaion

opion or Fannie- or Freddie-backed borrowers ha do no mee all o hese crie-

ria. Bu we propose ha he pilo ocus on his core group o es he model.

We also recommend ha he shared appreciaion pilo operae hrough he Home

Aordable Modicaion Program, or HAMP. Te Obama adminisraion recenly

announced new incenives or Fannie and Freddie o wrie down principal

hrough HAMP, which should help he companies keep more underwaer borrow-

ers in heir homes, according o our analysis.

Bu beore we go urher ino he deails o our proposal, les ake a closer look

a he negaive equiy crisis acing millions o American amilies oday, many o

which have loans backed by Fannie Mae or Freddie Mac.


8/31


America underwater

Home prices have declined more han 30 percen naionwide rom heir peak in

2006,7 leaving nearly one in our homeowners underwaer, owing more on heir

morgage han heir home is worh. Tas roughly 11 million underwaer amilies,

adding o more han $700 billion in oal negaive equiy. 8

O course, he housing crisis did no impac every communiy equally. In hard-hi ciies like Las Vegas, Miami, and Phoenix, prices have dropped more han 50

percen.9 Jus our saesCaliornia, Florida, Arizona, and Massachusets

accoun or hal o he naions oal negaive equiy.10 Bu he remaining saes

are sill acing serious hardships. Approximaely one-hird o properies wih

a morgage ousanding in Michigan and Georgia are underwaer, while more

han 20 percen o morgages in Ohio, Maryland, Virginia, Colorado, New

Hampshire, and Illinois are underwaer.11

Why is negaive equiy such a big problem? Research shows ha underwaer bor-

rowers are a higher risk o oreclosure han borrowers wih more equiy in heir

home. Cerainly he amoun o money a borrower acually pays on heir morgage

each monh relaive o heir income, oher expenses, and oher deb is a criical

componen o heir abiliy o avoid deaul. Bu paymen size is no he only con-

sideraion: A borrowers equiy posiion also maters quie a bi.

Underwaer loans deaul a a much higher rae han loans wih more equiy, even

aer accouning or ypes o morgages and borrower characerisics like credi

scores, according o a recen sudy by Laurie Goodman, Roger Ashworh, Brian

Landy, and Lidan Yang o Amhers Securiies.12

Te repor racked deaul aciviyor dieren ypes o loans wih dieren loan-o-value raios, he percenage o a

homes worh covered by a morgage loan.

The problem


9/31


Te sudy nds, or example, ha 2.5 percen o prime loans wih equiy a leas

20 percen (a loan-o-value raio o 80 percen or less) ransiion o deaul each

year, missing wo consecuive monhly paymens or he rs ime. For prime

loans wih 40 percen negaive equiy (a loan-o-value raio o greaer han 140

percen), ha rae is more han six imes higher: 16 percen.13

Tis ransiion is usually a ipping poin oward a borrower losing heir home.

Once an underwaer borrower ransiions o deaul by missing wo consecuive

monhly paymens, here is more han a 90 percen chance hey will miss a leas

he nex our paymens as well, according o he Amhers sudy.14

Tese acs shouldn come as a surprise. Families ha are hopelessly underwaer

oen canno see he long-erm upside rom making expensive monhly paymens

ino a bad invesmen. On he oher hand, borrowers wih more equiy are nau-

rally more likely o sick i ou in ough economic imes by making deep cus o

savings or oher areas o spending.

One important consideration here is the extent to which underwater

homeowners simply walk away rom their homes, deaulting even

though they can aord to keep making their monthly payments.

Despite anecdotal evidence to the contrary, the data show that these

so-called strategic deaults are not very common.

A recent Federal Reserve study o oreclosures on underwater mort-

gages in Arizona, Caliornia, Florida, and Nevada ound that about 80

percent o deaults occurred as a result o income shocks combined

with negative equity.15 This suggests that being underwater is

rarely the only reason or deault. Deault usually arises because the

problem o negative equity is combined with an additional economic

hardship such as reduced or lost income, new health care costs, or

other unexpected expenses.

To put it dierently, income or expense shocks can quickly tip a

underwater borrower who has kept up with his or her mortgag

ments into deault. Over the long run, especially in weak econo

periods when these kinds o shocks are more common, greater

bers o underwater borrowers will eventually nd themselves uto maintain their mortgage payments.

But the situation is a bit dierent or extremely underwater bor

rowers, in this case dened as mortgages that exceed the value

the home by more than 50 percent. About hal o those deault

driven by negative equity alone, according to a Fed study.16 So

strategic deaults do indeed occur, its limited to a small portio

all underwater borrowers that are extremely underwater.17 And

makes some sense because these borrowers oten have no hop

regaining lost equity over a reasonable time period.

The conundrum o strategic deault


10/31


Avoiding costly foreclosures

When a deeply underwaer borrowersay, a homeowner in Miami or Phoenix who

jus saw heir home lose hal is valuesars alling behind on heir morgage pay-

mens, lenders and invesors have wo basic opions: move orward on lenghy and

expensive oreclosure procedures or work ou a new deal he borrower can aord.18

In many cases oreclosure is no he bes oucome or any pary. Te adminisraive

coss, legal ees, oregone ineres, and losses on he propery will likely cos he

lender ens o housands o dollars. A Join Economic Commitee repor noed ha

he average oreclosure coss $78,00019 and a paper by he Federal Reserve Bank o

Chicago repored ha a oreclosure can cos lenders as much as $50,000.20 In con-

ras prevening oreclosure coss abou $3,300 on average, he paper noed.21

Meanwhile, he borrower will lose any iniial equiy in he home, ace high admin-

israive coss associaed wih oreclosure proceedings,22 and have a serious blem-ish on heir credi hisory, making i much harder o obain a loan in he uure.

And he borrowers neighbors would likely see he value o heir home suddenly

decrease jus because here was a oreclosure in he neighborhood.23

A loan modicaionlowering he monhly paymen by eiher changing he iner-

es rae, exending erms, deerring paymens, reducing principal, or some combina-

ion o hese sepsis oen he only way o preven cosly oreclosure proceedings

and keep a sruggling borrower in heir home. Each borrower has unique nancial

consrains, so loan modicaions mus be ailored o hose needs.

I a borrower has signican equiy in heir home bu jus saw heir income

reduced indeniely, a erm exension or ineres-rae modicaion migh be he

bes opion. Bu i a borrower is acing a emporary spike in expenses or drop in

income, hen a shor-erm paymen deerral migh be preerable. In cases where

he borrower is deeply underwaer and acing a long-erm economic hardship,

he mos eecive way o avoid oreclosure is o boh reduce monhly paymens

and rebuild equiy in he home. Tas where principal reducionlowering he

amoun he borrower acually owes on heir morgagecan help.

As we discuss laer in he paper, privae insiuions are already oering principal

reducions in specic insances. Bu no all morgage invesors are convinced

namely he counry s wo bigges morgage nance companies, Fannie Mae or

Freddie Mac, who own or guaranee more han 3 million underwaer morgages.24


11/31

8 Center or American Progress | Sharing the Pain and Gain in the Hosing Marets

The boulder in the path to principal reduction

Fannie Mae and Freddie Mac, boh under governmen conservaorship since

2008, are banned rom oering principal wrie-downs as par o heir modica-

ions by heir regulaor, he Federal Housing Finance Agency, or FHFA. Ta

makes FHFA he big boulder in he pah o principal reducion, according oormer Obama adminisraion economic advisor Jared Bernsein.25

Bu FHFAs own analysis shows ha principal reducion would acually help

he books o Fannie and Freddie in he long run. According o an FHFA repor

released in January, wrie-downs or all deeply underwaer borrowershose ha

owe a leas 15 percen more on heir morgage han heir home is worhwould

save Fannie Mae, Freddie Mac, and he axpayers supporing hem approximaely

$20 billion over he lie o hose loans relaive o no doing anyhing.26

Te repor wen on o explain FHFAs preerence oward principal orbearance, wherehe lender emporarily deers cerain principal and ineres paymens bu does no

change he oal amoun owned. Indeed, a principal orbearance plan on he same

underwaer loans was projeced o save Fannie and Freddie slighly more, bu FHFA

admis ha his dierence is negligible given he model risk.27 Well elaborae on he

dierences beween principal reducion and principal orbearance laer in his repor.

Simply pu, FHFAs posiion is no a mater o long-erm coss and benes, bu

shor-erm nancial oucomes.28 Principal reducions require he lender o rec-

ognize a signican wrie-down on heir books oday, while principal orbearance

requires a much lower wrie-down, mosly rom los ineres income. I FHFA is

solely ocused on near-erm losses a Fannie and Freddie, hen i will end o avoid

he immediae wrie-down whenever possible.

Bu here are good reasons o challenge FHFAs analysis. Firs, he repor was released

beore he Obama adminisraion announced new incenives or Fannie and Freddie

o wrie down principal hrough he Home Aordable Modicaion Program, or

HAMP. For he rs ime Fannie, Freddie, and privae lenders could ge as much as 63

cens on every dollar writen o, depending on he riskiness o he loan.29

FHFA is sill reviewing he possible consequences o he new HAMP rules on

is wo regulaory charges, Fannie and Freddie.Bu we esimae ha Fannie and

Freddie only need o ge back abou 9 cens on each dollar writen o o ip he

scales oward orgiveness insead o orbearance, based on he numbers in he

FHFAs own

analysis shows t

principal reduct

would actually h

the books of Fan

and Freddie in t

long run.


12/31


January repor.30 So he new HAMP incenives should more han ip he scales

oward principal reducion, according o our analysis.

Recen repors hin ha Fannie and Freddie are warming o he idea o princi-

pal reducion. In ac, Freddie Mac CEO Charles Ed Halderman recenly old

HousingWire ha principal reducions migh be in [Freddies] sel inres wihhe new HAMP incenives.31

Second, he January analysis by FHFA was limied o radiional principal wrie-

downs, as opposed o alernaive approaches o principal reducion ha could

spread risk and save Fannie and Freddie even more money. We will examine one

such approach, he shared appreciaion modicaion, laer in his repor. o

be clear, hough, we believe ha a argeed principal-reducion program makes

economic sense or Fannie Mae and Freddie Mac wihou a risk-sharing angle or

governmen subsidy. Bu hese added incenives simply cemen our case ha prin-

cipal reducion is good business pracice or Fannie and Freddie. In his way, anupron conribuion rom axpayers ips he scale in avor o he beter long-erm

oucome, ulimaely resuling in lower losses.

Tird, indusry expers have idenied several echnical issues wih FHFAs

analysis. Laurie Goodman rom Amhers Securiies recenly old Congress ha

she noiced serious echnical issues wih he conduc o he sudy. Noably,

he calculaion was done on a porolio level insead o a loan-by-loan basis,

which ignores he ac ha orbearance may be bes in some circumsances while

reducion migh be beter in ohers. Goodman also noed ha he FHFA analysis

considered atribues o he loan a originaion insead o curren atribues, which

could urher skew he impac o each modicaion on individual loans. Finally,

she said he analysis did no diereniae beween uninsured loans and hose wih

privae morgage insurance, a opic discussed in more deail laer in his repor.32

In he nal analysis we hink Fannie, Freddie, and FHFA should rehink heir

blanke ban on principal reducion.33 Laer in his repor well lay ou a specic

proposal or esing principal reducion on cerain Fannie and Freddie loans. Bu

rs, les ake a closer look a he economic raionale or principal reducion.

Fannie and Freddie ownguarantee about 30 mill

loans.34 O these:

About 11 percent3.3

mortgagesare under

Five percent1.4 mill

mortgagesare deep

underwater, meaning

outstanding debt is at

15 percent more than

homes current value36

Twenty-six percent o

deeply underwater lo

about 800,000 mortga

are delinquent37

Thirty-two percent o

seriously delinquent lo

owned or guaranteed Fannie and Freddie, in

ing those with positive

negative equity, have

mortgage insurance38

Fast acts abouunderwatermortgages atFannie and Fred


13/31


Te case or principal reducion is simple: Evidence shows ha equiy is an

imporan predicor o deaul, and principal orgiveness is he mos eecive way

o improve an underwaer borrowers equiy posiion. I done well and under

he righ circumsances, principal reducion can have a meaningul and posiive

impac on he broader housing marke. Les dig ino each o hese claims in urn.

Principal reduction can reduce the likelihood of foreclosure

As menioned above, he amoun o money a borrower acually pays on heir mor-

gage each monh relaive o heir income, oher necessary expendiures, and oher

deb is a criical componen o heir abiliy o avoid deaul. Tas why any eecive

modicaion mus rs aim o reduce he monhly paymen o a susainable level.

Bu or deeply underwaer loans, a borrowers equiy posiion meaningully

impacs heir likelihood o deaul as well. Tas why any cos-eecive modica-

ion o a severely underwaer loan should aim o boh reduce he paymen size and

resore he borrowers equiy.

Tis is precisely why analyss have ound ha principal reducions, which help resore

equiy by wriing down some o wha is acually owed, are generally more eecive

a miigaing oreclosures han oher ypes o modicaions. Te Amhers Securiies

paper menioned above provides some helpul daa on his. In general, loans ha

receive principal modicaionseiher hrough reducion or orbearanceexperi-

ence subsanially lower re-deaul raes han capializaion or ineres-rae modica-

ions. Te paper also nds ha principal modicaions save 5 ou o 10 deauled

loans rom oreclosure, while oher ypes o modicaions save jus 3 ou o 10.39

A separae sudy rom he New York Federal Reserve Bank conrms his, concluding

ha re-deaul raes were lower or privae subprime morgage modicaions involv-

ing principal orgiveness han hose involving ineres-rae reducions.40 And anoher

The economic case for

principal reduction


14/31


sudy rom he Universiy o Norh Carolinas Cener or Communiy Capial ound

ha modicaions combining principal wrie-downs and ineres-rae reducions

resuled in he highes repaymen raes compared o oher modicaions.41

Unorunaely, we do no have sucien daa o diereniae re-deaul raes in

principal-reducion and principal-orbearance modicaions on loans backed byFannie Mae and Freddie Mac. Bu is elling ha he model FHFA used in heir

analysis assumed ha principal orgiveness avoids more re-deauls han alerna-

ive modicaions.42

Principal reduction is good business practice

Given all o he economic evidence, i should be no surprise ha some privae

morgage lenders and servicers have implemened principal reducion as a cos

saver. More han 15 percen o privae modicaions involved some principalreducion in he hird quarer o 2011, according o a sel-repored survey rom

he Oce o he Comproller o he Currency.43 And perhaps more ellingly,

banks used some principal reducion or 18 percen o modicaions on heir own

porolio o loans.44 Tis includes some o he naions larges nancial insiuions,

such as JPMorgan Chase & Co. and Wells Fargo.45

A growing number o indusry expers suppor principal reducion as pruden

business pracice. Sana Clara Universiys Sanjiv R. Das las year ound ha modi-

caions using loan wrie-downs are value-maximizing or he lender compared

o alernaive approaches.46 A represenaive rom he global bond invesmen

gian PIMCO old Bloomberg in November ha reducions are oen in he bes

ineres o boh he lender and he borrower.47 And Ron Faris, presiden o he

morgage servicer Ocwen Financial Corp., recenly old ShelerForce ha prin-

cipal reducion is a win or he invesor in he loan as well as he loans servicer,

according o his rms modeling.48 In a separae publicaion, Ocwens Faris said:

Taking into account homeowner income, home valuation, degree o delinquency,

borrower acceptance, prepayment and re-deault probabilities, resolution time-

lines and other relevant data, our optimization models and behavioral scienceresearch increasingly demonstrate that principal-reduction modifcations o

underwater mortgages are indeed [net present value] positive or investors. 49


15/31


And is worh noing more privae rms are likely o embrace principal reducion

in he coming monhs aer a recen setlemen over auly oreclosure pracices

by he ve bigges morgage servicers required a $17 billion und or principal

reducions and oher orms o relie o sruggling homeowners.50 Indeed, Bank o

America announced las monh is inenion o reduce principal or approximaely

200,000 o is underwaer borrowers.51

Principal reduction helps neighborhoods, local housing markets,

and the broader economy

Is clear ha principal reducion, in paricular insances, can be he mos eecive

way o modiy a morgage o avoid unnecessary oreclosure. Bu principal reduc-

ion also has a posiive impac on he housing marke as a whole, which remains

one o he bigges drags on our economic recovery.

Firs, when a lender or servicer avoids unnecessary oreclosures, i helps sabilize

home prices and local housing markes. According o a recen sudy rom he

Massachusets Insiue o echnology, oreclosure reduces a homes value by an

average o 27 percen.52 And since home prices are oen derived rom comparable

homes in he neighborhood, ha single oreclosure also reduces home values or

everyone else in ha neighborhood, according o he repor.53

Second, like oher loan modicaions, principal reducions can meaningully and

permanenly reduce monhly morgage paymens, which increase he disposable

income o households who need i mos.54 oday amilies digging heir way ou

o morgage deb are no spending as much on clohes, ood, and oher consumer

goods, discouraging businesses rom invesing and bringing on new employees.

A ocused principal-reducion iniiaive or loans guaraneed by Fannie Mae and

Freddie Mac should help simulae he economy by puting more money in he

hands o hose who are likely o spend i.

Tird, homeowners wih litle equiy (as well as anyone uncerain o he value

o heir propery) are oen relucan o inves in renovaions and upgrades.

Specically, underwaer borrowers end o cu back subsanially on homeimprovemens and mainenance spending, according o a 2010 sudy rom

Norhwesern Universiys Brian . Melzer.55 So principal reducions ha bring a

borrower o (or close o) posiive equiy should help drive up demand or home-

Principal reduct

also has a positi

impact on the

housing market

as a whole, whic

remains one of

the biggest drag

on our econom

recovery.


16/31


relaed indusries rom window curains o washing machines, while improving

he overall qualiy o he housing sock.

For hese reasons, principal reducions oer he bes odds o ending he housing

crash more quickly and deniively, according o Mark Zandi, chie economis a

Moodys Analyics, and could give a much-needed boos o he broader economy.56

Any principal-reduction initiative must be done carefully

Te rs goal o any principal-reducion iniiaive a Fannie Mae and Freddie

Mac should be o preven unnecessary oreclosures and save axpayer dollars.

For he program o have signican upake, i mus presen a good deal or boh

he invesor and he borrower.

Tis means wo hings. Firs, a responsible program mus bring a bene o Fannieand Freddie omorrow or he loss heyre realizing oday. Tere are undeniable

risks associaed wih principal wrie-downs so he program mus maximize he

poenial upside o Fannie, Freddie, and axpayers.

Second, i mus only apply o he borrowers ha need i mos: underwaer home-

owners who are acing oreclosure or are in imminen danger o deaul bu have

a ghing chance o meeing heir morgage paymens going orward i oered a

principal reducion. In order o maximize impac o he program and preven he

mos oreclosures, hus saving more money in he long run, he program has o be

available o some borrowers ha have sared alling behind on heir paymens.

Aer all, hese borrowers are he mos likely o experience a oreclosure.

Bu his poses a poenial problem. I principal reducion is only eligible o delin-

quen borrowers, i could incenivize oherwise-curren borrowers o purposely

deaul in order o qualiy, commonly reerred o as he moral hazard problem.

Indeed, abou hree ou o our underwaer Fannie and Freddie borrowers are sill

making heir monhly paymens, according o FHFA.57 Te las hing Fannie and

Freddie wan o do is o push hose curren borrowers ino unnecessary deaul.

Fannie and Freddie can ake seps o minimize he moral hazard problem, even i

he program is resriced mosly o delinquen borrowers. Te simples soluion

would be o make his a one-ime program open o borrowers ha are already


17/31


delinquen when he program begins. Such a rule limis he borrowers abiliy o

deaul inenionally jus o be eligible.58

A second opion is o make he program eligible o curren borrowers on he verge

o alling behind in heir morgage paymens. Bu his migh raise legal concerns or

cerain ypes o Fannie- and Freddie-backed loans. Te abiliy o Fannie or Freddieo oer principal reducions o curren borrowers may be resriced by heir respec-

ive morgage-servicing guidelines governing morgage-loan modicaions. Fannie

Maes guidelines, or example, only permi loan modicaions on loans ha are 60

days delinquen or are curren bu a imminen risk o deaul.59 Considering hese

complexiies, is clear ha eligibiliy mus be deermined on a loan-by-loan basis.

A hird opion is o impose some cos on he borrower in exchange or program

paricipaion, making principal reducion unatracive o hose who don ruly

need i. Well discuss one way o do his laer in his repor.

Any argeed principal-reducion program also raises cerain airness concerns. Te

Federal Reserve noed in a recen whie paper ha such eors could discriminae

agains hose who were more conservaive in heir borrowing or home purchases.60

Is imporan o noe who his program acually benes. As menioned above,

a successul principal reducion porgram helps he borrower avoid oreclosure,

which also benes he broader housing marke. Aer all, each oreclosure in a

neighborhood reduces he value o neighboring homes locaed wihin 250 ee by

abou 1 percen.61 Bu is also helps he books o Fannie and Freddie, which in urn

benes every axpayer on he hook or he morgage gians losses.

Ta said, les ake a look a one way Fannie and Freddie can simulaneously

arge he program o he righ borrowers, minimize moral hazard, and maximize

long-erm savings: a so-called shared appreciaion modicaion.


18/31


A argeed shared-appreciaion modicaion program implemened a Fannie

Mae and Freddie Mac could overcome he moral hazard problem and bene bor-

rowers, he wo morgage gians, and axpayers. Trough his program, morgage

lenders agree o wrie o some o he ousanding principal on a morgage, conin-

gen on imely monhly paymens, in exchange or a share o any uure apprecia-

ion in he homes value.62

Tis approach essenially imposes a cos on borrowers or any deb orgivenessby requiring borrowers o give up a porion o any uure increases in he homes

value.63 Tis should help discourage he small number o curren borrowers who

would choose o sraegically deaul, ensuring ha borrowers who receive prin-

cipal reducion are hose who need i mos. Te lender can also phase in he prin-

cipal reducion over a cerain ime period, under he condiion ha he borrower

keeps making heir monhly paymens. Tus he borrower earns a permanen

principal reducion over ime, urher limiing moral hazard.

Shared-appreciaion morgages have already been implemened successully in he

privae secor. Ocwen Financial, he counry s larges subprime morgage servicer,

reduces principal or cerain underwaer morgages wih a resrucured loan-o-

value arge o 95 percen, meaning he borrower resores 5 percen equiy in he

home. o encourage he borrower o coninue meeing his or her morgage obliga-

ions, Ocwen phases in he reducion in hree incremens over hree years. In

exchange, i he borrower chooses o sell he home or renance he morgage, he

invesor receives 25 percen o he appreciaed value o he home.64 Te invesor

can claim up o he amoun o principal hey iniially wroe down.

o adequaely deal wih he underwaer morgage problem we realize hayouve go o include principal reducion or long-erm susainabiliy, Ocwen

CEO Ron Faris old Shelterorce las monh. We also needed o address he issue

o invesors no always being happy ha principals being orgiven, Faris said. Te

shared-appreciaion model accomplishes boh o hese goals, he added.65

A solution: A shared-appreciation

modification program at Fannie

and Freddie


19/31


Ocwen only oers a principal reducion o a borrower when is in heir nancial

ineres, based on an esimae o overall coss and revenues over he lie o he

loan, known in morgage parlance as a ne-presen-value assessmen. So each

modicaion depends on he loan and he borrowers specic circumsances.

Ocwens shared-appreciaion pilo appears o be working. Las year he rmrepored re-deaul raes o less han 3 percen or program paricipans, ar below

whas seen in ypical loan modicaions.66 By comparison, approximaely 29 per-

cen o all privae modicaions in 2010 re-deauled wihin 12 monhs, according

o daa rom he Oce o he Comproller o he Currency.67

As mentioned above, the Federal Housing Finance Agency, theregulator in charge o Fannie Mae and Freddie Mac, reuses to allow

principal reduction on Fannie and Freddie loans, instead opting or

principal orbearance. We believe that principal reductions with so-

called shared appreciation, where Fannie and Freddie get a share o

any uture increase in home values, strengthens the business case or

targeted principal reductions.

FHFA Acting Director Edward DeMarco recently deended principal

orbearance, stating that it works very much in accord with the spirit o

principal reduction with shared appreciation but poses less risk to Fan-

nie and Freddie and thus to taxpayers.68 We disagree.

In reality, principal orbearance and shared-appreciation orgiveness

are quite dierent, as principal orbearance does less to help severely

underwater borrowers. Notably, orbearance allows the lender or in-

vestor to temporarily reduce monthly payments and postpone losses,

while orgiveness makes that change permanent and improves the

borrowers equity position, likely lowering the chance o oreclosure

even urther.

Heres how orbearance works. Through principal orbearance, the

lender temporarily sets aside the underwater portion o a borrowers

principal and oregoes any interest on the deerred principal. The bor-

rowers monthly mortgage payments go down temporarily, but their

equity position does notthey are still responsible or the ull loan

amount. The lender records a relatively minor loss on its book tand only writes the property down to its current value in the ev

a short sale or oreclosure. 69

With a principal reduction the lender recognizes a larger write-d

its books today in hopes o saving more money tomorrow by avo

oreclosure. Like orbearance the borrowers monthly payments g

down, but the change during principal reduction is permanent. T

reduction also improves the borrowers equity position, which lik

decreases the chance o deault, as we demonstrated above.

The inclusion o shared appreciation would allow Fannie and Fred

gain back some o those losses in the uture. Similar to orbearan

nal write-down refected on their books depends on the resale p

down the lineeither through a traditional resale, a short sale, o

oreclosure sale. This means Fannie and Freddie can realize uture

ater an immediate write-down i the uture sale o the property r

in a higher value than that recognized at the time o the write-do

The bottom line is simple: I temporarily reducing monthly pay

is the only thing that matters, principal orbearance is likely the

option. But i the borrower is also severely underwater and is ca

o making payments on a more permanent solution, principal r

tion with shared appreciation might be a better long-term alte

or the homeowner, Fannie and Freddie, and taxpayers.

The diference between principal orbearance and shared-appreciation principal orgiven


20/31


How a shared-appreciation pilot can work at Fannie and Freddie

Tere is no conclusive evidence, including he recen analysis oered by FHFA, o

sugges ha principal orbearance should always be preerable o principal reducion

or some homeowners sruggling wih morgages ha are severely underwaer bu

capable o paying on lower morgage paymens. Tas one reason why FHFA shouldrehink is across-he-board ban on principal reducion and adop a pilo ha allows

us o beter undersand wha works bes under which circumsances.

We recommend ha Fannie, Freddie, and FHFA enac a argeed principal-

reducion program hrough a shared-appreciaion modicaion pilo or severely

underwaer borrowers. We adap a model similar o Ocwens in our proposal, bu

ocus on borrowers ha are mos likely o bene rom a reducion, based on a

loan-by-loan assessmen. Specically, we expec Fannie and Freddie o arge he

ollowing borrowers or heir shared-appreciaion pilo:

Morgage is worh a leas 115 percen o he homes curren value Eiher delinquen (bu no ye in oreclosure) or a imminen risk o deaul Facing a long-erm economic hardship, such as a nonemporary decrease in

income or a permanen increase in unavoidable spending Does no have privae morgage insurance or a second lien, such as a home

equiy loan

We recommend ha Fannie, Freddie, and FHFA operae his shared-appreciaion

pilo hrough he Home Aordable Modicaion Program, or HAMP. As men-

ioned above, he Obama adminisraion released new incenives or lenders

and invesors o ake a wrie-down on morgage principal as par o ederally

suppored loan modicaions.70 While we hink here are paricular insances in

which principal reducion makes good business sense wihou he subsidy, hese

incenives should expand he number o morgages in which i is in he bes eco-

nomic ineress o lenders and invesors o ake a wrie-down.

Now les ake a closer look a he deails o our proposed pilo program, including

wha borrowers will be eligible and how he agreemen will be srucured.


21/31


Equity requirements

We recommend some fexibiliy in he amoun o equiy he lender is required o

resore. While Ocwens model o resoring 5 percen posiive equiy has proven

eecive, i may no be necessary o orgive ha much in all cases. Indeed, analysis

rom Amhers Securiies concluded ha i is only necessary o wrie he borrower

down o he 110-percen-o-120-percen loan-o-value range in order o give

borrowers sucien skin in he game, since borrowers have reasonable hope o

resoring posiive equiy wih moderae home price appreciaion.73

For FHFAs analysis menioned above, he model considered wriing down

severely underwaer morgages o a loan-o-value raio o 115 percenwhich is

he same equiy requiremen or HAMPs Principal Reducion Alernaive. We

recommend using he same benchmark, a leas or any iniial pilo.

The Home Aordable Modication Program, or HAMP, was established

in 2009 to help struggling homeowners stay in their homes through

ederally supported loan modications. The primary goal o any HAMP

modication is to reduce the borrowers monthly housing payments to

31 percent o monthly income. The program is eligible to both delin-

quent borrowers and those determined to be in imminent deault.71

HAMP has so ar supported nearly 1 million permanent-loan modica-

tions, including more than $3.7 billion in principal reductions.72

The HAMP program includes a sequence o modications that

lenders must consider beore they are allowed to oer a principal

modication, known as the HAMP waterall. As the graphic below

demonstrates, principal modications, either through orbearance

or reduction, are the last step taken in order to get borrowers to the

target debt-to-income ratio.

Since October 2010 the Treasury Department has oered additional

incentives under HAMP or servicers, lenders, and investors to reduce

principal, known as the Principal Reduction Alternative. As mentioned

above, the Obama administration recently tripled those incentives, and

or the rst time extended them to Fannie Mae and Freddie Mac.

The HAMP waterall

CAPITALIZE ARREARS

Late payments, fees, and other

charges are added back to the loan

balance in order to determine themodified loan amount.

REDUCE THE INTEREST RATE

ON THE LOAN

The interest rate on the loan is

reduced until the borrowers

debt-to-income ratio hits 31 percent.

EXTEND THE LOAN TERMS

If the interest rate reduction did n

bring the borrowers debt-to-inco

ratio down to 31 percent, extend t

maturity of the loan to 40 years.

MODIFY PRINCIPAL

If the 31 percent target d

to-income ratio has not

hit, forbear or forgive pr

Target: 31% of monthly gross inc


22/31


Loan-by-loan consideration

As menioned above, roughly hree ou o our underwaer borrowers wih

Fannie-or Freddie- backed morgages are curren on heir paymens.74 For he

25 percen ha are behind, Fannie and Freddie should coninue o evaluae loan

modicaions on a loan-by-loan basis using he rules and guidelines o HAMP,based on reliable ne-presen value esimaes. Ne-presen value is a nancial ool

or evaluaing he value o an asse such as a home morgage over ime based on

esimaed cash fows rom he asse. Bu now his assessmen should consider he

coss and benes o shared-appreciaion modicaions.

As menioned above, much o his depends on he naure o he borrowers eco-

nomic hardship. Principal reducion is especially useul when a borrower aces lasing

economic shocks, such as cerain healh care coss or an exended drop in salary or

wages. Ye more emporary shocks ha can be reasonably resolved in a shor period

o ime migh warran anoher orm o modicaion, such as principal orbearance.

We recommend ha any shared-appreciaion program adap he guidelines laid

ou in he nancial hardship adavi currenly in use or HAMP. Tis docu-

men helps morgage servicers ailor specic modicaions o specic hard-

ships, including reduced income, increased expenses, overexended credi, and

insucien cash reserves.75

Appreciation share

Any shared-appreciaion program will need o srike he righ balance beween

borrower upake and value o he lender or invesor. I he borrower is giving up

oo much, hey will no wan o paricipae. I he invesor is geting oo litle, hey

will likely choose alernaive approaches, including oreclosure.

Tere are a variey o poenial ways o achieve his balance. For pilo purposes

we recommend Fannie and Freddie iniially receive hal o any uure appreci-

aed value o he home in exchange or oering a principal reducion. Bu Fannie,

Freddie, and FHFA should be encouraged o explore oher ways o share apprecia-ion wih he borrower. For example, Fannie and Freddie could receive varying

shares o appreciaed value o he home depending on he condiion o he home,

he local real esae marke in which i is locaed, and he degree o which he bor-

rower is underwaer. Fannie and Freddie could ake a greaer share o he apprecia-


23/31


ion or homes ha are in worse condiion or in communiies ha are prediced o

recover slower, and less o a share or less-risky modicaions.

Second liens

According o CoreLogic, abou 40 percen o all underwaer borrowers have a

home equiy loan or line o credi, and morgages wih home equiy loans accoun

or more han hal o all negaive equiy oday.76 In insances where an underwaer

borrower has boh a rs and second morgage, we srongly believe ha second

morgage invesors should share he burden.

Bu recen hisory shows ha is much easier said han done, especially when he sec-

ond lien is held by a dieren invesor han he rs. In cases where here is a second

lien, i is oen very dicul o have he second lien holder agree o a principal reduc-

ion wih he resul ha he process salls or ails compleely. o preven a windall osecond-lien invesors ha reuse o embrace he wrie-down, we recommend Fannie

and Freddie ocus his pilo on loans ha do no have second morgages.

Ta said, we urge Fannie and Freddie o consider ways o work wih (or around)

second liens when reducing principal. As he rs lien holder, Fannie and Freddie do

have signican negoiaion power over he second lien holder since hey can always

move orward wih oreclosure procedures.77 In ac, heres a good argumen or giv-

ing second lien holders he rs loss posiion on any principal reducion, meaning

he rs morgage should only be reduced aer all oher liens have been wiped ou,

since hese invesors were aware o he riskiness o relying on he collaeral or heir

home equiy loans and oher second liens when hey rs len he money. Bu again,

ha sraegy only works i he second lien holder agrees o play along.

One possible way o work around a second lien is o srip he rs lien o rom

he second, assuming i does no have any collaeral value, leaving he noe in

place. Te rs lien holder is hen ree o reduce principal on he rs morgage

alone, while he borrower can pursue urher reducions i necessary on he noe

hrough bankrupcy cour, jus as hey can wih an auo loan or credi card deb.78

O course, his would require he second-lien invesors o cooperae volunarily,which could prove o be ye anoher roadblock. Fannie and Freddie will have o

address hese issues on a loan-by-loan basis.

To prevent a

windfall to seco

lien investors th

refuse to embra

the write-down

recommend Fan

and Freddie foc

this pilot on loa

that do not have

second mortgag


24/31


Private mortgage insurance

Abou 32 percen o seriously delinquen loans ha Fannie and Freddie own or

guaranee have privae morgage insurance, meaning he wo morgage nance

gians only ake on a porion o he losses in he case o a oreclosure.79 Tis insur-

ance is a requiremen or any Fannie or Freddie loan wih a down paymen o lesshan 20 percen, so we expec an even higher percenage o underwaer Fannie

and Freddie loans are insured.

When a loan wih morgage insurance deauls, he insurance company usually bears

mos or all o he loss. Tus, on an individual loan i is he insurerno Fannie o

Freddiewho has he mos o gain rom avoiding oreclosure. Tas why he iniial

pilo should ocus rs on deeply underwaer loans wihou morgage insurance.

In cases where he loan is insured, Fannie and Freddie should work wih he insur-

ance provider and he borrower o nd a muually agreeable principal reducion,wih shared appreciaion as one available opion. 80 Anoher opion is or he privae

insurer o pay a so-called advance claim, providing Fannie and Freddie wih a

porion o he insurance claim beore deaul, mos o which is passed on o he bor-

rower in he orm o a principal reducion. Since he borrower is more likely o keep

making paymens, everyone is beter o. And i he borrower deauls anyway, he

insurer pays he remainder o claim, leaving Fannie and Freddie no worse o.


25/31


Despie all o he empirical evidence, privae-secor experience, and promising

new ways o wrie down morgage deb responsibly, Fannie Mae and Freddie Mac

haven ye deployed principal reducion as a viable oreclosure-miigaion ool or

severely underwaer borrowers. And heir regulaor, he Federal Housing Finance

Agency, wih ull auhoriy o plo a dieren course, has ye o urge he wo mor-

gage nance gians o do so.

We undersand he complexiies involved in conserving he asses o he worldswo larges morgage rms. Bu he evidence suggess ha i is ime or FHFA o

rehink is posiion on principal reducion.

As a good rs sep, FHFA should rerun is analysis o he coss and economic

benes o principal orgiveness compared o alernaive loan modicaions,

incorporaing boh he new incenives or principal reducion hrough HAMP and

he use o shared appreciaion. I his analysis proves o ip he scales oward prin-

cipal reducionrecen repors indicae i willhen Fannie, Freddie, and FHFA

should sand ready o li he ban on principal reducion and pilo a argeed,

shared appreciaion modicaion program.

Sen. Bob Menendez (D-NJ) in February inroduced a bill ha would esablish a

similar shared-appreciaion pilo program or underwaer borrowers wih Fannie-

or Freddie-backed morgages.81 Tis bill is a helpul jumping-o poin or uure

debae on he coss and benes o principal reducion. While we believe i is well

wihin FHFAs curren regulaory power o develop his pilo wihou congressio-

nal approval, we encourage Congress o work wih Fannie, Freddie, and heir regu-

laor o develop a program ha arges hose who mos need a principal reducion

and works in he bes ineres o all paries involved.

Clearly, principal reducion will no be a silver bulle o our housing woes. o

successully mee he needs o he more han 3 million underwaer amilies wih

Fannie or Freddie-backed loans, no o menion he millions more sruggling o

Conclusion


26/31


say in heir homes, principal reducion mus be one par o a broader soluion

ha includes renancing, oreclosure mediaion, alernaive loan modicaion,

and oher oreclosure-miigaion ools. Were a long way rom he end o he crisis,

and we need o keep all opions on he able moving orward.


27/31


About the authors

John Griffith is a Policy Analys wih he Economic Policy eam a he Cener

or American Progress. Prior o joining CAP, John worked as an analys wih he

Social and Economic Policy Division o Ab Associaes, where he conduced

research on ederal homeless assisance, aordable housing, and communiydevelopmen programs.

Jordan Eizenga was a Policy Analys wih CAPs Economic Policy eam a he

ime his repor was writen. Prior o joining he Cener, Jordan was a Hamilon

Fellow in he Deparmen o he reasury where he worked wih communiy

developmen nancial insiuions o expand credi and equiy invesmens in

disressed and underserved domesic markes.

Acknowledgements

We would like o hank he ollowing individuals or heir insigh, advice, and edis:

David Abromowiz, Michael Barr, Gadi Decher, Ehan Handelman, Paul Leonard,

David Min, Daniel Molior, Ed Paisley, Janneke Raclie, Ellen Seidman, Mark Willis,

and Barry Zigas. Wed also like o hank he dozens o expers wih whom we con-

suled anonymously as we draed his repor.


28/31

25 Center or American Progress | Sharing the Pain and Gain in the Hosing Marets

1 Corelogic, Corelogic Reports Negatie Eqity Increasein Q4 2011,, Press reease, March 1, 2012, aaiae athttp://.coreogic.com/aot-s/researchtrends/asset_poad_e360_14435.pd.

2 Jstin T. Hiey, REO renta program to captre 20%o orecosre pipeine, Hosingwire, March 5, 2012,aaiae at http://.hosingire.com/artice/reo-

renta-program-captre-20-orecosre-pipeine.

3 kein wac, Forecosre Crisis Not Een Ha wayOer, American baner, Noemer 18, 2011, aaiaeat http://.americananer.com/isses/176_224/orecosre-crisis-report-center-or-responsie-end-ing-1044163-1.htm.

4 Oce o the Comptroer o the Crrency, OCC Mort-gage Metrics Report, Third Quarter 2011 (Department o

Treasry, 2011), aaiae at http://.occ.treas.go/pications/pications-y-type/other-pications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pd.

5 Federa Hosing Finance Agency, Conserators Reporton the Enterprises Financia Perormance - ThirdQarter 2011 (2011), aaiae at http://.ha.go/Deat.aspx?Page=172.

6 Federa Hosing Finance Agency, FHFA Anayses oPrincipa Forgieness loan Modications (2012), aai-ae at http://.ha.go/ees/23056/Principa-Forgienesstr12312.pd.

7 S&P Indices Press Reease, March 27, 2012, aaiae at:http://.standardandpoors.com/indices/sp-case-shier-home-price-indices/en/s/?indexId=spsa-cashpidf--p-s----.

8 Corelogic, Corelogic Reports Negatie Eqity Increasein Q4 2011.,

9 S&P Indices, A Three Home Price Composites End2011 at Ne los According to the S&P/ Case-ShierHome Price Indices.

10 Corelogic, Corelogic Reports Negatie Eqity Increase

in Q4 2011.,

11 Iid.

12 larie S. Goodman and others, The Case or PrincipaRedctions, The Journal of Structured Finance 17 (3)(2011).

13 Iid.

14 Iid.

15 Nei bhtta, Jane Doo, and Hi Shan, The Deptho Negatie Eqity and Mortgage Deat Deci-sions (washington: Federa Resere board, 2010),aaiae at http://.ederaresere.go/ps/eds/2010/201035/201035pap.pd.

16 Iid.

17 Extremey nderater mortgages mae p a smapercentage o Fannie- and Freddie-aced oans.According to FHFA, ony aot 135,000 GSE oans hada oan-to-ae ratio o 150 or more as o Jne 2010. Atthe time, that as ess than ha a percent o a oansoned or garanteed y Fannie and Freddie. For a readon, see http://.ha.go/ees/23056/PrincipaForgienesstr12312.pd.

18 Oten the preerae ay or a orroer to redce theirmonthy mortgage payments is throgh renancing.unortnatey, orroers that are oth nderater anddeinqent are say not eigie or renancing.

19 Joint Economic Committee, Shetering Neighorhoodsrom the Sprime Forecosre Storm (2007), aaiaeat http://jec.senate.go/archie/Docments/Reports/

sprime11apr2007reised.pd.

20 Desiree Hatcher, Forecosre Aternaties: A Case orPresering Homeonership (Chicago: The Federa Re-sere ban o Chicago, 2006), aaiae at http://s.chicagoed.org/digita_assets/pications/protise_nes_and_ies/2006/02_2006_orecosre_at.pd.

21 Iid.

22 One stdy estimates the aerage administratie costso orecosre tota aot $7,200. See: Anne M oreno,The Cost-Efectieness o Mortgage ForecosrePreention (Minneapois: Famiy Hosing Fnd, 1995),aaiae at http://.hnd.org/_dnd/reports/MFP_1995.pd.

23 John Y. Campe, Steano Gigio, and Parag Patha,Forced Saes and Hose Prices, American Economic

Review101 (5) (2011). For more, see: http://e.mit.ed/press/2010/hosing-prices.htm

24 Ted Gayer, Ho Many borroers Might Qaiy orPrincipa Redction under the Mortgage Settement?,brooings Instittion, March 1, 2012, aaiae at http://.rooings.ed/opinions/2012/0301_mortgage_agreement_gayer.aspx.

25 Jared bernstein, More On Principa Redction: A NeInitiatie From the white Hose That Shod Hep Cear

That Path, On the Economy, Janary 27, 2012, aaiaeat http://jaredernsteinog.com/more-on-principa-redction-a-ne-initiatie-rom-the-hite-hose-that-shod-hep-cear-the-path/.

26 Federa Hosing Finance Agency, FHFA Anayses oPrincipa Forgieness loan Modications.

27 Iid.

28 Its orth noting that FHFA representaties haeexpressed some concern that a arge-scae principa-redction program od reqire signicant training,changes to stang ees, and ne oan managementsystems. This is an important consideration henpanning any piot program in the tre, t e do notnd it critica to the argment or or against principaredction.

29 Jon Prior, Treasry to pay inestors tripe or HAMPprincipa redctions,,Hosing wire, Janary 27, 2012,aaiae at http://.hosingire.com/2012/01/27/treasry-to-pay-inestors-tripe-or-hamp-principa-redctions.

30 According to the FHFA report, a principa-orearanceprogram or a seerey nderater oansoans ith

a oan-to-ae ratio o 115 or highersaes aot$4 iion more than a principa orgieness programor the same oans. The program od either orgieor deer payment on a tota o $42 iion in negatieeqity. That means Fannie od reqire aot 9 centson each doar ritten of to mae principa redctionthe est option (or 4 diided y 42). S ee Tae 3 or thera data: http://.ha.go/ees/23056/Princi-paForgienesstr12312.pd.

Endnotes
http://www.corelogic.com/about-us/researchtrends/asset_upload_file360_14435.pdfhttp://www.corelogic.com/about-us/researchtrends/asset_upload_file360_14435.pdfhttp://www.housingwire.com/article/reo-rental-program-capture-20-foreclosure-pipelinehttp://www.housingwire.com/article/reo-rental-program-capture-20-foreclosure-pipelinehttp://www.americanbanker.com/issues/176_224/foreclosure-crisis-report-center-for-responsible-lending-1044163-1.htmlhttp://www.americanbanker.com/issues/176_224/foreclosure-crisis-report-center-for-responsible-lending-1044163-1.htmlhttp://www.americanbanker.com/issues/176_224/foreclosure-crisis-report-center-for-responsible-lending-1044163-1.htmlhttp://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pdfhttp://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pdfhttp://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pdfhttp://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pdfhttp://www.fhfa.gov/Default.aspx?Page=172http://www.fhfa.gov/Default.aspx?Page=172http://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----http://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdfhttp://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://jec.senate.gov/archive/Documents/Reports/subprime11apr2007revised.pdfhttp://jec.senate.gov/archive/Documents/Reports/subprime11apr2007revised.pdfhttp://wwws.chicagofed.org/digital_assets/publications/profitwise_news_and_views/2006/02_2006_foreclosure_alt.pdfhttp://wwws.chicagofed.org/digital_assets/publications/profitwise_news_and_views/2006/02_2006_foreclosure_alt.pdfhttp://wwws.chicagofed.org/digital_assets/publications/profitwise_news_and_views/2006/02_2006_foreclosure_alt.pdfhttp://www.fhfund.org/_dnld/reports/MFP_1995.pdfhttp://www.fhfund.org/_dnld/reports/MFP_1995.pdfhttp://web.mit.edu/press/2010/housing-prices.htmlhttp://web.mit.edu/press/2010/housing-prices.htmlhttp://www.brookings.edu/opinions/2012/0301_mortgage_agreement_gayer.aspxhttp://www.brookings.edu/opinions/2012/0301_mortgage_agreement_gayer.aspxhttp://www.brookings.edu/opinions/2012/0301_mortgage_agreement_gayer.aspxhttp://jaredbernsteinblog.com/more-on-principal-reduction-a-new-initiative-from-the-white-house-that-should-help-clear-the-path/http://jaredbernsteinblog.com/more-on-principal-reduction-a-new-initiative-from-the-white-house-that-should-help-clear-the-path/http://jaredbernsteinblog.com/more-on-principal-reduction-a-new-initiative-from-the-white-house-that-should-help-clear-the-path/http://www.housingwire.com/2012/01/27/treasury-to-pay-investors-triple-for-hamp-principal-reductionshttp://www.housingwire.com/2012/01/27/treasury-to-pay-investors-triple-for-hamp-principal-reductionshttp://www.housingwire.com/2012/01/27/treasury-to-pay-investors-triple-for-hamp-principal-reductionshttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.housingwire.com/2012/01/27/treasury-to-pay-investors-triple-for-hamp-principal-reductionshttp://www.housingwire.com/2012/01/27/treasury-to-pay-investors-triple-for-hamp-principal-reductionshttp://www.housingwire.com/2012/01/27/treasury-to-pay-investors-triple-for-hamp-principal-reductionshttp://jaredbernsteinblog.com/more-on-principal-reduction-a-new-initiative-from-the-white-house-that-should-help-clear-the-path/http://jaredbernsteinblog.com/more-on-principal-reduction-a-new-initiative-from-the-white-house-that-should-help-clear-the-path/http://jaredbernsteinblog.com/more-on-principal-reduction-a-new-initiative-from-the-white-house-that-should-help-clear-the-path/http://www.brookings.edu/opinions/2012/0301_mortgage_agreement_gayer.aspxhttp://www.brookings.edu/opinions/2012/0301_mortgage_agreement_gayer.aspxhttp://www.brookings.edu/opinions/2012/0301_mortgage_agreement_gayer.aspxhttp://web.mit.edu/press/2010/housing-prices.htmlhttp://web.mit.edu/press/2010/housing-prices.htmlhttp://www.fhfund.org/_dnld/reports/MFP_1995.pdfhttp://www.fhfund.org/_dnld/reports/MFP_1995.pdfhttp://wwws.chicagofed.org/digital_assets/publications/profitwise_news_and_views/2006/02_2006_foreclosure_alt.pdfhttp://wwws.chicagofed.org/digital_assets/publications/profitwise_news_and_views/2006/02_2006_foreclosure_alt.pdfhttp://wwws.chicagofed.org/digital_assets/publications/profitwise_news_and_views/2006/02_2006_foreclosure_alt.pdfhttp://jec.senate.gov/archive/Documents/Reports/subprime11apr2007revised.pdfhttp://jec.senate.gov/archive/Documents/Reports/subprime11apr2007revised.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdfhttp://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdfhttp://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----http://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/Default.aspx?Page=172http://www.fhfa.gov/Default.aspx?Page=172http://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pdfhttp://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pdfhttp://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pdfhttp://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pdfhttp://www.americanbanker.com/issues/176_224/foreclosure-crisis-report-center-for-responsible-lending-1044163-1.htmlhttp://www.americanbanker.com/issues/176_224/foreclosure-crisis-report-center-for-responsible-lending-1044163-1.htmlhttp://www.americanbanker.com/issues/176_224/foreclosure-crisis-report-center-for-responsible-lending-1044163-1.htmlhttp://www.housingwire.com/article/reo-rental-program-capture-20-foreclosure-pipelinehttp://www.housingwire.com/article/reo-rental-program-capture-20-foreclosure-pipelinehttp://www.corelogic.com/about-us/researchtrends/asset_upload_file360_14435.pdfhttp://www.corelogic.com/about-us/researchtrends/asset_upload_file360_14435.pdf


29/31


31 Jon Prior, Freddie CEO signas GSE principa redctioncod e soon, Hosingwire, MArch 23, 2012, aaiaeat http://.hosingire.com/artice/reddie-ceo-signas-gse-principa-redction-cod-e-soon.

32 larie S. Goodman, Testimony eore the Senate S-committee on Hosing, Transportation and CommnityDeeopment, Strengthening the Hosing Maretand Minimizing losses to Taxpayers, March 15, 2012,aaiae at http://aning.senate.go/pic/index.cm?FseAction=Fies.vie&FieStore_id=096e0f-8500-41a5-a02-0139d0d2e07.

33 Fannie Mae and Freddie Mac crrenty ao short saeson homes that secre oans they garantee. A shortsae aos orroers ho cannot meet their mor tgagepayments to aoid orecosre proceedings y seingtheir home or ess than the ae o the mortgage. Theenderin this case Fannie Mae or Freddie Macthentaes a rite-don on the amont o the mortgage notcoered y the sae o the home. Many o these shortsaes happen ater a orroer has re-deated oo-ing another oan modication. In those instances, shortsaes are a ise aternatie to a orecosre proceeding.For other orroers ho are receiing a short saeecase they cannot qaiy or a oan modication,hoeer, it seems simper and ess expensie to a-o the homeoner to receie a principa redctionithot haing to se the home to another yer. Atera, a short sae is simiar to a principa redction in thatthe ender sti redces the amont o money it i

receie. I Fannie and Freddie are going to rite donthe principa on the oans they garantee, in certaininstances, they can aoid the added costs and hasseassociated ith the sae o a home and, instead, aothe homeoner to stay in the home.

34 As o Jne 2010. Federa Hosing Finance Agency,FHFA Anayses o Principa Forgieness loan Modica-tions.

35 Gayer, Ho Many borroers Might Qaiy or PrincipaRedction under the Mortgage Settement?

36 As o Jne 2010. Federa Hosing Finance Agency,FHFA Anayses o Principa Forgieness loan Modica-tions.

37 Iid.

38 larie S. Goodman, Testimony eore the Senate S-committee on Hosing, Transportation and CommnityDeeopment.

39 Iid.

40 Andre Haghot, Eiere Oah, and Joseph Tracy,Second Chances: Sprime Mortgage Modicationand Re-Deat (Ne Yor: Federa Resere ban oNe Yor Staf Reports, 2009 (reised Agst 2010)),aaiae at http://.neyored.org/research/staf_reports/sr417.pd.

41 Roerto G. Qercia, lei Ding, and Jannee Ratcife,loan Modications and Redeat Ris: An Examina-tion o Shor t-Term Impact (Chape Hi, NC: uNC Centeror Commnity Capita, 2009), aaiae at http://.ccc.nc.ed/docments/lM_March3_%202009_na.pd.

42 The report states that the mode, and hence the anay-sis, taes into accont the sstainaiity o the modi-cations and assmes that principa orgieness redcesthe rates o re-deat on the oans to a greater extentthan od orearance. See page 2 at http://.ha.go/ees/23056/PrincipaForgienesstr12312.pd.

43 Oce o the Comptroer o the Crrency, OCC Mort-gage Metrics Report, Third Quarter 2011.

44 Iid.

45 Feix Samon, when ans ontariy do principaredctions, Reters, Jy 11, 2011, aaiae at http://ogs.reters.com/eix-samon/2011/07/11/hen-ans-ontariy-do-principa-redctions/.

46 Sanji R. Das, The Principa Principe, orthcomingJournal of Finance and Quantitative Analysis 2011,

aaiae at http://.rhsmith.md.ed/nance/pds_docs/SeminarFa2011/SanjiDasPaper2.pd.

47 Jody Shenn and key bit, Greg lippmann Cas orMortgage Forgieness Ater winning Sprime wa-gers. boomerg, No 4, 2011, aaiae at http://.oomerg.com/nes/2011-11-04/ex-trader-ippmann-cas-or--s-mortgage-orgieness-ater-sprime-ets.htm.

48 Harod Simon, Sheterorce Interie: Ron Faris,Ocen CEO, Sheterorce, March 12, 2012, aaiae athttp://.sheterorce.org/artice/2581/ron_aris_oc-en_ceo/.

49 Ocen Financia Corp, Cring underater Mortgages,Preenting Forecosres and Aoiding Mora Hazard

Throgh Principa Redction, Shared AppreciationModications (2011), aaiae at http://.rat-

anta.org/docments/nes/conerences/11rer/11rer_nesmith.pd.

50 under the terms o the settement, these nds are notaaiae on mortgages oned or garanteed y Fan-nie Mae and Freddie Mac. For more, see: Daid Min andAon Cohen, understanding the Ne Mortgage Fore-cosre Settement (washington: Center or Am ericanProgress, 2012), aaiae at http://.american-progress.org/isses/2012/02/orecosre_settement.htm.

51 Jim Pzzanghera, ban o America to redce principaor p to 200,000 homeoners,Los Angeles Times,March 9, 2012, aaiae at http://.atimes.com/siness/money/a--mo-an-o-america-mortgag-es-20120309,0,5615384.story.

52 Campe, Gigio, and Patha, Forced Saes and Hose

Prices.

53 Iid.

54 It is important to note the tax impications o principaredction. Prior to 2007 i a ender orgae moneyoed, the orroer od hae to record that orgienamont o det as income. The Mortgage Det ReieAct o 2007 aos taxpayers to excde rom incomep to $2 miion in orgien mortgage det on principaresidences.

55 brian T. Mezer, Mortgage Det Oerhang: RedcedInestment y Homeoners ith Negatie Eqity(2010), aaiae at http://.eogg.northest-ern.ed/acty/mezer/Papers/CE_det_oer-hang_082210.pd.

56 Mar Zandi, Testimony eore the Senate baning Com-

mittee, Ferary 9, 2012, aaiae at http://thehi.com/ogs/on-the-money/1007-other/212867-oernight-money-hosing-maret-goes-nder-the-microscope.

57 Aan Zie, what Does Ed DeMarco Reay ThinAot Principa write-Dons?, The Wall Street Journal,Ferary 28, 2012, aaiae at http://ogs.sj.com/deeopments/2012/02/29/hat-does-ed-demarco-reay-thin-aot-principa-rite-dons/.
http://www.housingwire.com/article/freddie-ceo-signals-gse-principal-reduction-could-be-soonhttp://www.housingwire.com/article/freddie-ceo-signals-gse-principal-reduction-could-be-soonhttp://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=0f96e0ff-8500-41a5-a0f2-0139d0df2e07http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=0f96e0ff-8500-41a5-a0f2-0139d0df2e07http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=0f96e0ff-8500-41a5-a0f2-0139d0df2e07http://www.newyorkfed.org/research/staff_reports/sr417.pdfhttp://www.newyorkfed.org/research/staff_reports/sr417.pdfhttp://www.ccc.unc.edu/documents/LM_March3_%202009_final.pdfhttp://www.ccc.unc.edu/documents/LM_March3_%202009_final.pdfhttp://www.ccc.unc.edu/documents/LM_March3_%202009_final.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://blogs.reuters.com/felix-salmon/2011/07/11/when-banks-voluntarily-do-principal-reductions/http://blogs.reuters.com/felix-salmon/2011/07/11/when-banks-voluntarily-do-principal-reductions/http://blogs.reuters.com/felix-salmon/2011/07/11/when-banks-voluntarily-do-principal-reductions/http://www.rhsmith.umd.edu/finance/pdfs_docs/SeminarFall2011/SanjivDasPaper2.pdfhttp://www.rhsmith.umd.edu/finance/pdfs_docs/SeminarFall2011/SanjivDasPaper2.pdfhttp://www.bloomberg.com/news/2011-11-04/ex-trader-lippmann-calls-for-u-s-mortgage-forgiveness-after-subprime-bets.htmlhttp://www.bloomberg.com/news/2011-11-04/ex-trader-lippmann-calls-for-u-s-mortgage-forgiveness-after-subprime-bets.htmlhttp://www.bloomberg.com/news/2011-11-04/ex-trader-lippmann-calls-for-u-s-mortgage-forgiveness-after-subprime-bets.htmlhttp://www.bloomberg.com/news/2011-11-04/ex-trader-lippmann-calls-for-u-s-mortgage-forgiveness-after-subprime-bets.htmlhttp://www.shelterforce.org/article/2581/ron_faris_ocwen_ceo/http://www.shelterforce.org/article/2581/ron_faris_ocwen_ceo/http://www.frbatlanta.org/documents/news/conferences/11rer/11rer_nesmith.pdfhttp://www.frbatlanta.org/documents/news/conferences/11rer/11rer_nesmith.pdfhttp://www.frbatlanta.org/documents/news/conferences/11rer/11rer_nesmith.pdfhttp://www.americanprogress.org/issues/2012/02/foreclosure_settlement.htmlhttp://www.americanprogress.org/issues/2012/02/foreclosure_settlement.htmlhttp://www.americanprogress.org/issues/2012/02/foreclosure_settlement.htmlhttp://www.latimes.com/business/money/la-fi-mo-bank-of-america-mortgages-20120309,0,5615384.storyhttp://www.latimes.com/business/money/la-fi-mo-bank-of-america-mortgages-20120309,0,5615384.storyhttp://www.latimes.com/business/money/la-fi-mo-bank-of-america-mortgages-20120309,0,5615384.storyhttp://www.kellogg.northwestern.edu/faculty/melzer/Papers/CE_debt_overhang_082210.pdfhttp://www.kellogg.northwestern.edu/faculty/melzer/Papers/CE_debt_overhang_082210.pdfhttp://www.kellogg.northwestern.edu/faculty/melzer/Papers/CE_debt_overhang_082210.pdfhttp://thehill.com/blogs/on-the-money/1007-other/212867-overnight-money-housing-market-goes-under-the-microscopehttp://thehill.com/blogs/on-the-money/1007-other/212867-overnight-money-housing-market-goes-under-the-microscopehttp://thehill.com/blogs/on-the-money/1007-other/212867-overnight-money-housing-market-goes-under-the-microscopehttp://blogs.wsj.com/developments/2012/02/29/what-does-ed-demarco-really-think-about-principal-write-downs/http://blogs.wsj.com/developments/2012/02/29/what-does-ed-demarco-really-think-about-principal-write-downs/http://blogs.wsj.com/developments/2012/02/29/what-does-ed-demarco-really-think-about-principal-write-downs/http://blogs.wsj.com/developments/2012/02/29/what-does-ed-demarco-really-think-about-principal-write-downs/http://blogs.wsj.com/developments/2012/02/29/what-does-ed-demarco-really-think-about-principal-write-downs/http://blogs.wsj.com/developments/2012/02/29/what-does-ed-demarco-really-think-about-principal-write-downs/http://thehill.com/blogs/on-the-money/1007-other/212867-overnight-money-housing-market-goes-under-the-microscopehttp://thehill.com/blogs/on-the-money/1007-other/212867-overnight-money-housing-market-goes-under-the-microscopehttp://thehill.com/blogs/on-the-money/1007-other/212867-overnight-money-housing-market-goes-under-the-microscopehttp://www.kellogg.northwestern.edu/faculty/melzer/Papers/CE_debt_overhang_082210.pdfhttp://www.kellogg.northwestern.edu/faculty/melzer/Papers/CE_debt_overhang_082210.pdfhttp://www.kellogg.northwestern.edu/faculty/melzer/Papers/CE_debt_overhang_082210.pdfhttp://www.latimes.com/business/money/la-fi-mo-bank-of-america-mortgages-20120309,0,5615384.storyhttp://www.latimes.com/business/money/la-fi-mo-bank-of-america-mortgages-20120309,0,5615384.storyhttp://www.latimes.com/business/money/la-fi-mo-bank-of-america-mortgages-20120309,0,5615384.storyhttp://www.americanprogress.org/issues/2012/02/foreclosure_settlement.htmlhttp://www.americanprogress.org/issues/2012/02/foreclosure_settlement.htmlhttp://www.americanprogress.org/issues/2012/02/foreclosure_settlement.htmlhttp://www.frbatlanta.org/documents/news/conferences/11rer/11rer_nesmith.pdfhttp://www.frbatlanta.org/documents/news/conferences/11rer/11rer_nesmith.pdfhttp://www.frbatlanta.org/documents/news/conferences/11rer/11rer_nesmith.pdfhttp://www.shelterforce.org/article/2581/ron_faris_ocwen_ceo/http://www.shelterforce.org/article/2581/ron_faris_ocwen_ceo/http://www.bloomberg.com/news/2011-11-04/ex-trader-lippmann-calls-for-u-s-mortgage-forgiveness-after-subprime-bets.htmlhttp://www.bloomberg.com/news/2011-11-04/ex-trader-lippmann-calls-for-u-s-mortgage-forgiveness-after-subprime-bets.htmlhttp://www.bloomberg.com/news/2011-11-04/ex-trader-lippmann-calls-for-u-s-mortgage-forgiveness-after-subprime-bets.htmlhttp://www.bloomberg.com/news/2011-11-04/ex-trader-lippmann-calls-for-u-s-mortgage-forgiveness-after-subprime-bets.htmlhttp://www.rhsmith.umd.edu/finance/pdfs_docs/SeminarFall2011/SanjivDasPaper2.pdfhttp://www.rhsmith.umd.edu/finance/pdfs_docs/SeminarFall2011/SanjivDasPaper2.pdfhttp://blogs.reuters.com/felix-salmon/2011/07/11/when-banks-voluntarily-do-principal-reductions/http://blogs.reuters.com/felix-salmon/2011/07/11/when-banks-voluntarily-do-principal-reductions/http://blogs.reuters.com/felix-salmon/2011/07/11/when-banks-voluntarily-do-principal-reductions/http://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdfhttp://www.ccc.unc.edu/documents/LM_March3_%202009_final.pdfhttp://www.ccc.unc.edu/documents/LM_March3_%202009_final.pdfhttp://www.ccc.unc.edu/documents/LM_March3_%202009_final.pdfhttp://www.newyorkfed.org/research/staff_reports/sr417.pdfhttp://www.newyorkfed.org/research/staff_reports/sr417.pdfhttp://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=0f96e0ff-8500-41a5-a0f2-0139d0df2e07http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=0f96e0ff-8500-41a5-a0f2-0139d0df2e07http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=0f96e0ff-8500-41a5-a0f2-0139d0df2e07http://www.housingwire.com/article/freddie-ceo-signals-gse-principal-reduction-could-be-soonhttp://www.housingwire.com/article/freddie-ceo-signals-gse-principal-reduction-could-be-soon


30/31


58 This idea as initiay ofered y larie Goodman oAmherst Secrities. For more inormation, see: larie S.Goodman, Testimony eore the Senate Scommitteeon Hosing, Transportation and Commnity Deeop-ment.

59 See: Fannie Mae, 2012 Sericing Gide, Part vII, Chap-ter vII, 602: Mortgage loan Modications.

60 Federa Resere board, The u.S. Hosing Maret: CrrentConditions and Poicy Considerations (2012).

61 Campe, Gigio, and Patha, Forced Saes and HosePrices.

62 Andre Capin and others, Faciitating Shared Ap-preciation Mortgages to Preent Hosing Crashesand Afordaiity Crises (washington: The HamitonProject, 2008), aaiae at http://.rooings.ed/papers/2008/09_mortgages_capin.aspx.

63 A shared-appreciation mortgage is the nctionaeqiaent to taxing the tre appreciated ae o ahome.

64 Ocen Financia Corp, Cring underater Mortgages,Preenting Forecosres and Aoiding Mora Hazard

Throgh Principa Redction, Shared AppreciationModications, March 2011.

65 Harod Simon, Sheterorce Interie: Ron Faris,

Ocen CEO, Sheterorce, March 12, 2012, aaiae athttp://.sheterorce.org/artice/2581/ron_aris_oc-en_ceo/.

66 kenneth R. Harney, Ocen Financia expandingprogram or nderater orroers, los Angees Times,Agst 7, 2011, aaiae at http://artices.atimes.com/2011/ag/07/siness/a--harney-20110807.

67 Oce o the Comptroer o the Crrency, OCC Mort-gage Metrics Report, Third Quarter 2011.

68 Senate Committee on baning, Hosing and uranAfairs, Hearing on the State o the Hosing Maret:Remoing barriers to Economic Recoery, Part II,video, aaiae at http://aning.senate.go/pic/index.cm?FseAction=Hearings.lieStream&Hearing_id=7a7a9d5-3946-4e97-9222-58a7e9a3934. Minte154.

69 under HAMP or non-GSE mortgages, principaorearance is reported y the sericer to the trsteeor secrities administrator as a reaized oss. For moreinormation, see https://.hmpadmin.com/porta/programs/docs/hamp_sericer/mhahandoo_30.pd.

70 For more, see: John Grith, Jannee Ratcife, andDaid Aromoitz, Rearding Homeoners or Goodbehaior (washington: Center or American Progress,2012), aaiae at http://.americanprogress.org/isses/2012/02/mortgage_re.htm.

71 See: Freddie Mac, Singe-Famiy Seer/Sericer Gide,vome 2, Chapter C65, Section 65.4.

72 u.S. Department o Treasry, Maing Home Afordae:Program Perormance Report Throgh Janary 2012(2012), aaiae at http://.treasry.go/initiaties/nancia-staiity/rests/MHA-Reports/Docments/Jan%202012%20MHA%20Report_wITH_SERvICER_AS-SESSMENTS_FINAl.PDF.

73 Goodman and others, The Case or Principa Redc-tions.

74 Aan Zie, what Does Ed DeMarco Reay Thin AotPrincipa write-Dons?

75 For more inormation on the HAMP economic hardshipgideines, see https://.eanniemae.com/s/orms-docs/orms/1021.jsp.

76 Corelogic, Corelogic Reports Negatie Eqity Increasein Q4 2011.,

77 For more on this isse, see: Feix Samon, GretchenMorgensons izarre deense o Ed DeMarco, Reters,March 25, 2012, aaiae at http://ogs.reters.com/eix-samon/2012/03/25/gretchen-morgensons-izarre-deense-o-ed-demarco/.

78 The enets o separating the ien rom the note iseing expored as part o research eing done at Ne

Yor uniersitys Frman Center or R ea Estate anduran Poicy. The research is part o or on a hitepaper on second iens to e issed y the FrmanCenter ater this year.

79 larie S. Goodman, Testimony eore the Senate S-committee on Hosing, Transportation and CommnityDeeopment.

80 Fannie and Freddie crrenty do not ao priatemortgage insrers to redce principa on the oansthey on or garantee. PMI Grop, the nations argestpriate mortgage insrer, has gotten arond this ydirecty paying some nderater orroers that oreach month they stay crrent. For more in ormation,see: Shaia Dean, Freddie and Fannie Reject DetReie,The New York Times, Octoer 5, 2011, aaiae athttp://.nytimes.com/2011/10/06/siness/oppo-sition-rom-reddie-and-annie-stas-det-redction.

htm?pageanted=a.

81 The i od create a second piot program or nder-ater oans insred y the Federa Hosing Administra-tion, a goernment-rn mortgage insrer. For moreinormation on the Menendez i, see: Andre Scog-gin, Senate i gies principa rite-dons throghshared-appreciation pan, Hosingwire, Ferary 9,2012, aaiae at http://.hosingire.com/artice/senate-i-gies-principa-rite-dons-throgh-shared-appreciation-pan?qictas_connect=0.
http://www.brookings.edu/papers/2008/09_mortgages_caplin.aspxhttp://www.brookings.edu/papers/2008/09_mortgages_caplin.aspxhttp://www.shelterforce.org/article/2581/ron_faris_ocwen_ceo/http://www.shelterforce.org/article/2581/ron_faris_ocwen_ceo/http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.LiveStream&Hearing_id=7a7af9d5-3946-4e97-9222-58af7e9a3934http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.LiveStream&Hearing_id=7a7af9d5-3946-4e97-9222-58af7e9a3934http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.LiveStream&Hearing_id=7a7af9d5-3946-4e97-9222-58af7e9a3934https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/mhahandbook_30.pdfhttps://www.hmpadmin.com/portal/programs/docs/hamp_servicer/mhahandbook_30.pdfhttp://www.americanprogress.org/issues/2012/02/mortgage_refi.htmlhttp://www.americanprogress.org/issues/2012/02/mortgage_refi.htmlhttp://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/Documents/Jan%202012%20MHA%20Report_WITH_SERVICER_ASSESSMENTS_FINAL.PDFhttp://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/Documents/Jan%202012%20MHA%20Report_WITH_SERVICER_ASSESSMENTS_FINAL.PDFhttp://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/Documents/Jan%202012%20MHA%20Report_WITH_SERVICER_ASSESSMENTS_FINAL.PDFhttp://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/Documents/Jan%202012%20MHA%20Report_WITH_SERVICER_ASSESSMENTS_FINAL.PDFhttps://www.efanniemae.com/sf/formsdocs/forms/1021.jsphttps://www.efanniemae.com/sf/formsdocs/forms/1021.jsphttp: