US Treasury Forcing Principal Forgiveness

"Late Friday the US Treasury Department announced a major expansion of its Home Affordable Modification Program (HAMP).

The three-year-old program has been largely deemed unsuccessful, as it has provided just about 750,000 borrowers with permanent loan modifications. The initial expectation from government officials was that it would help three to four million borrowers.

 'Clearly the initial program erred on the side of making sure taxpayers were protected, but it didn’t do enough to help the overall economy,' said Michael Barr, former Asst. Treasury Secretary for Financial Institutions and one of HAMP’s original architects.

Now taxpayers will pony up the cash, as Treasury is tripling the financial incentives to lenders and opening the program up to Fannie Mae, Freddie Mac and investors in rental properties. The money would come out of TARP funds, i.e. from the taxpayers. We still don’t know if Fannie and Freddie will participate, since their conservator, the FHFA’s Ed De Marco, has been actively fighting principal write down for years. A week ago he sent a letter to members of congress explaining the math behind his argument.

But the Treasury may be forcing De Marco’s hand. He claimed that writing down mortgage principal would cost $4 billion more than the modifications that Fannie and Freddie are doing now. Those involve interest rate reduction and principal forbearance. The newly expanded HAMP, however, with its triple- sized cash incentives, would shore up that $4 billion hole. Funny how he mentioned that hole on Monday, and the Treasury announced the new plan Friday.  'If he [De Marco] doesn’t get to yes, then he has no political leg to stand on,' says FBR’s Ed Mills, who estimates the enhanced program could add one million borrowers to its ranks.

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