Study Shows Helping Homeowners Avoid Foreclosure Saves Taxpayers Money

The Federal Housing Finance Agency (FHFA), which is tasked with regulating government backed mortgage giants Fannie Mae and Freddie Mac, will soon make a decision regarding whether or not it will allow Fannie and Freddie to reduce mortgage amounts for troubled borrowers. Several analyses have shown that reducing mortgage principal is the most effective step for preventing foreclosures, and now an FHFA analysis shows that it could be a good deal for taxpayers as well:

As the regulator for Fannie Mae and Freddie Mac nears its decision on whether to approve debt forgiveness for troubled borrowers, a new analysis by the regulator suggests taxpayers could benefit from the move, according to people briefed on the findings.

Fannie and Freddie could save about $3.6 billion more than current loss-mitigation approaches by reducing balances for some borrowers who owe much more than their homes are worth, these people said.

As Center for American Progress housing analyst John Griffith explained, “Fewer foreclosures help more than just struggling homeowners. Local housing markets are better off, as each foreclosure decreases the value of every other home in the neighborhood. And since the average foreclosure costs more than $50,000 to the lender or investor, avoiding default often helps the books of Fannie and Freddie, which in turn benefits every taxpayer on the hook for their losses.” As former White House economist Jared Bernstein added, principal reduction “has proved to be an important resource for helping certain folks to stay in their homes, avoiding foreclosure and, as FHFAs new analysis shows, saving billions for the GSEs and thus the taxpayers who are still supporting these agencies.”

The FHFA has been waffling on principal reductions for quite a while, but this new analysis shows, once again, that providing help for homeowners has benefits for the wider economy.