If the Federal Housing Finance Agency launches a mortgage principal forgiveness program, only loans that have been sold to Fannie Mae and Freddie Mac would qualify, so it wouldn't have a direct effect on credit union balance sheets, CUNA Executive Vice President and General Counsel Eric Richard told Credit Union Times.
In fact, such a program might even benefit institutions like credit unions that hold second liens, because principal forgiveness “would force the losses down the throats of the holder of the first,” Richard said.
However, principal forgiveness could create “me-too” pressure on credit unions, the CUNA attorney said, because consumers don't understand the secondary mortgage market.
“Your members could come to you saying 'my neighbor got this, and I want the same from you',” he said.
A principal forgiveness modification program could reduce losses to Fannie and Freddie, but it would be at the expense of other federal agencies who would subsidize the loss, which would ultimately be paid by taxpayers, said CUNA Chief Economist Bill Hampel.
Hampel played down FHFA Director Edward DeMarco's comments about principal forgiveness he made Tuesday at the Brookings Institute, saying he thinks most have misinterpreted them.
DeMarco has been opposed to principal write-downs for long time, and has taken a lot of heat for that position from Democrats on the Hill and the Obama Administration, Hampel said.
“So, he looked at it again, and said 'we haven't reached a conclusion, but there are a set of circumstances where adopting this program could reduce losses to Fannie and Freddie',” the CUNA economist said. “He also said it could increase the incentive for those who have been paying on the first … to become delinquent enough to quality for principal reduction.”
Some who have heard DeMarco oppose write-downs for months now say the door is open for them, Hampel said, but others say he will stick with his opposition.
“So, jumping to the conclusion from his speech from yesterday that they are about to adopt a policy in favor of principal write-downs is a big stretch,” Hampel said.
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