BILL ANALYSIS �
AJR 40
Page 1
Date of Hearing: July 2, 2011
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AJR 40 (Skinner) - As Introduced: May 15, 2012
SUBJECT : Mortgages
SUMMARY : Urges the Federal Housing Finance Agency (FHFA), and
specifically its director, Edward DeMarco, to immediately allow
the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac) to offer
principal reductions to homeowners who owe more than their homes
are worth. Specifically, this bill :
1)Makes the following findings and declarations:
a) Since 2008, more than half a million Californians have
lost their homes to foreclosure and another half million
homes are currently in foreclosure or are at imminent risk
of foreclosure; and
b) There are over 2 million California homes currently
"underwater" where property owners owe more than what the
home is worth and collectively the value of these homes is
over $196 billion; and
c) Foreclosures too often become vacant, boarded-up
hazards, lower surrounding property values, increase
criminal activity in neighborhoods, and discourage economic
development and investment in communities; and
d) The wave of foreclosures that has already hit California
substantially decreased tax revenue, which led to budget
deficits, increased unemployment, and billions of dollars
in cuts to schools, health services, and other vital
services; and
e) Fannie Mae and Freddie Mac, the two companies that
control over one-half of the home loans in the United
States, and specifically over 60 percent of California
mortgages; and
f) The director of the FHFA, Edward DeMarco, has
steadfastly opposed allowing Fannie Mae or Freddie Mac to
AJR 40
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offer principal reductions to homeowners who owe more on
their homes than what they are worth; and
g) On February 9, 2012, Attorney General Kamala Harris
announced that California will join a national servicing
settlement that is estimated to provide up to $40 billion
in benefits to borrowers across the country and much of
these benefits include a program of principal reductions;
and
h) Fannie Mae and Freddie Mac refused to participate in the
national settlement agreement, meaning more than one-half
of the home loans in the country will see no relief from
this agreement; and
i) Many economists and housing experts agree that principal
reductions are the most helpful tool for limiting the
number of foreclosures; and
j) By refusing to allow principal reductions, the FHFA is
ensuring that tens of millions of homeowners nationwide
will continue to owe more on their home loans than what
their homes are worth; and
aa) Allowing principal reductions for Fannie Mae and Freddie
Mac mortgages could deter another wave of costly
foreclosures nationwide.
FISCAL EFFECT : None
COMMENTS :
The Housing and Economic Recovery Act of 2008 (HERA), which
created FHFA, granted the Director of FHFA discretionary
authority to appoint FHFA conservator or receiver of the Fannie
Mae and Freddie Mac (Enterprises) "for the purpose of
reorganizing, rehabilitating, or winding up the affairs of a
regulated entity." This response came about from substantial
losses in the portfolios of the Enterprises that amounted to
combined losses of $261 billion from 2007 to the third quarter
of 2011. Additionally, as of December 31, 2011, Treasury has
committed over $183 billion to support the Enterprises.
The key issue raised by AJR 40 is that the Enterprises
participate in loan modifications via the Home Affordable
AJR 40
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Mortgage Program, but FHFA the conservator of the Enterprises
refuses to allow them to engage in principal reduction of loans
in those cases where it might prevent foreclosure.
Much of the debate regarding FHFA refusal to participate in
principal reductions began in correspondence between FHFA and
the United State Congress, House Committee on Oversight and
Government Reform (Committee). In response to a request from
the Committee, FHFA provided an analysis, on January 20, 2012,
of the impact of principal reduction on the performance of loans
in the Enterprises' portfolio. In summary FHFA provided:
In considering a program of principal reduction for
underwater borrowers, FHFA used the net present value model
developed to implement the Home Affordable Modification
Program (HAMP). Using the HAMP NPV model for borrowers with
mark-to-market loan-to-value (LTV) ratios greater than 115
percent, FHFA compared projected losses to Fannie Mae and
Freddie Mac from borrowers receiving principal forbearance
modifications to borrowers receiving principal forgiveness
modifications as allowed in the HAMP program. The model,
and hence the analysis, takes into account the
sustainability of the modifications and assumes that
principal forgiveness reduces the rates of re-default on
the loans to a greater extent than would forbearance.
However, in the event of a successful modification,
forbearance offers greater cash flows to the investor than
forgiveness. The net result of the analysis is that
forbearance achieves marginally lower losses for the
taxpayer than forgiveness, although both forgiveness and
forbearance reduce the borrower's payment to the same
affordable level.
It is important to note that it appears that the analysis
conducted by FHFA examined the costs associated with principal
writes of all of the Enterprises' loans, not just those where
the borrower could reach a sustainable payment.
Subsequent to this correspondence, on May 1, 2012, the Committee
sent a letter to FHFA detailing findings that, contrary to
testimony provided by Acting Director Demarco, that Fannie Mae
has examined principal reduction and that their research
revealed that principal reduction would indeed reduce taxpayer
losses on the Fannie Mae portfolio. The overall conclusion of
the letter was that:
AJR 40
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Contrary to your testimony, we have now obtained a wide
range of internal documents demonstrating that Fannie Mae
officials conducted detailed, substantive analyses and
concluded years ago that principal reduction programs have
enormous potential to save U.S. taxpayers significant
amounts of money by reducing overall losses from
foreclosures following default.
The core of the disagreement between FHFA and those in favor of
principal reduction is that FHFA has hid behind a financial
analysis of the impact of principal reduction on their fiscal
stability, yet their own analysis implies that the decision to
not do principal reduction was a result of ideological belief,
not the desire to protect taxpayers.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County, and Municipal Employees
(AFSCME)
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081