In January 2012, FHFA released the analyses the agency had conducted since December 2010 on the feasibility and benefit of principal forgiveness as a loan modification tool.[1] This paper presents the agency’s most recent work, which considers subsidy payments[2] the Department of the Treasury would provide to Fannie Mae and Freddie Mac (the Enterprises) for reducing principal under the Home Affordable Modification Program (HAMP). The paper includes a number of sensitivity tests related to assumptions in the January 2012 analysis and methodological changes suggested by various industry, academic, and governmental organizations. Treasury will use taxpayer funds appropriated to it under the Emergency Economic Stabilization Act of 2008 to make subsidy payments to the Enterprises.
This paper is limited to an account of FHFA’s model-based research. It does not include a discussion of, nor do the results presented reflect the complex challenges, significant costs, and substantial time required to implement the HAMP Principal Reduction Alternative (HAMP PRA)—the HAMP modification that includes principal forgiveness. The Enterprises already participate in the original HAMP modification program, referred to as "standard HAMP."
After a brief introduction, the analyses are presented in three sections:
- Isolated Analysis of Principal Forbearance and Forgiveness
- Incorporation of the HAMP and HAMP PRA Waterfalls
- Optimal HAMP Modification
[1] Letter to Congress on the Use of Principal Forgiveness by Fannie Mae and Freddie Mac
[2] Treasury will use taxpayer funds appropriated to it under the Emergency Economic Stabilization Act of 2008 to make subsidy payments to the Enterprises.