August 14, 2012 at 15:36 PM EDT
FHFA Blocking Efforts to Alleviate US Housing Crisis
The Federal Housing Finance Agency (FHFA) is playing a major role in frustrating government attempts to address the housing crisis, and broader initiatives being explored by cities, municipalities, and states to alleviate household distress and promote recovery, according to Oxford Analytica. Excerpts from Efforts to reduce mortgage crisis fail The [...]

The Federal Housing Finance Agency (FHFA) is playing a major role in frustrating government attempts to address the housing crisis, and broader initiatives being explored by cities, municipalities, and states to alleviate household distress and promote recovery, according to Oxford Analytica.

Excerpts from Efforts to reduce mortgage crisis fail

The Federal Housing Finance Agency (FHFA) announced on August 8 that it may take action against any states or municipalities that use eminent domain powers to seize and refinance ‘underwater mortgages’ (ie, where the outstanding mortgage exceeds the property’s current value).

The failure of the federal government to enact an effective policy that would allow borrowers to refinance underwater mortgages continues to impose a significant drag on US economic performance.

Many borrowers remain locked into their current (high interest) mortgages, unable to take advantage of low interest rates, because lenders are not willing to refinance loans for more than current assessed valuations.

Eminent domain proposals have been floated before, but FHFA officials and Treasury Secretary Timothy Geithner have been publicly critical. Through its oversight role over Fannie Mae and Freddie Mac, FHFA has considerable power over housing markets, and could choose to punish entities that might use eminent domain, by, for example, making it more difficult to take out or refinance GSE-backed loans in those locations.

These efforts might be buttressed by credit rating agencies, which could threaten to downgrade the debt of any city, state, or municipality that enacts such a policy. Moreover, the Securities Industry and Financial Markets Association (SIFMA), a leading industry trade group, has threatened to exclude mortgages exposed to eminent domain risk from mortgage-backed securities pools. This threat, at least in theory, could increase the costs, and reduce availability, of mortgage loans in these jurisdictions.

FHFA and the opposition of the administration of President Barack Obama will, for now, prevent states and localities from using eminent domain power to seize underwater mortgages, allowing borrowers to refinance at lower rates. This is good news for banks and mortgage-backed securities holders, who do not want to realise losses on their portfolios, but bad news for economic growth. However, there could be further state and local government efforts to compel loan modification.

Technorati Tags: housing, mortgage modification, residential mortgage-backed securities, RMBS

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