Mortgage Principal Relief: Possible Lessons from the US
This post was written by John McHale
On the Private Debt Relief thread, commenters Brog and John Gallagher (same person?) usefully draw our attention to the debate on participation of the GSEs (Fannie Mae and Freddie Mac) in the HAMP-PRA programme (Home Affordable Modification Program – Principal Reduction Assistance).
The federally sponsored GSEs hold a substantial fraction of US mortgages, and so their position is somewhat analogous to Ireland’s state-owned banks. The GSEs are administered by the independent Federal Housing Finance Agency (FHFA). John draws our attention to correspondence from the US Treasury to the agency, urging its participation in the HAMP-PRA programme. (See here; speech by head of FHFA at the Brookings Institution here.) This program, one of a number in operation to improve the functioning of the US housing market, provides subsidies to mortgage holders for principal reductions. The gist of the correspondence is that such reductions could, depending on the case, have a positive net present value for the owner of the mortgage. Indeed, it is argued that the gains in NPV would more than cover the cost of the subsidy, resulting in a net gain to taxpayers. The correspondence also discusses strategic default concerns.
Of course, given the differences in the housing markets – e.g. the relative importance of non-recourse loans in the US – the estimations are at best suggestive for the Irish case. But the broad approach to thinking about the issue is useful.
One issue that is not explicitly taken into account is the possible macroeconomic benefit of facilitating household balance sheet repair. Here again the Irish situation is different given the state creditworthiness challenge and the importance of avoiding further losses at the banks. A programme that ends up with a net cost to the state (from combination of any subsidy and the need to inject further capital into the banks) would further erode the financial position and creditworthiness of the state. To the extent that weaker creditworthiness (and the associated “fear of default”) feeds back to higher interest rates and lower growth this would be a macroeconomic cost. Nevertheless, it is worth looking at how these issues are being addressed elsewhere.