Rumor Obama will force Fannie Mae & Freddie Mac to forgive negative equity mortgage debt for underwater mortgages

If you haven't seen it yet, there is a rumor running around that the Obama administration will order Fannie Mae and Freddie Mac to forgive a portion of mortgage debt for home owners in negative equity.

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie.

Now claiming main street is going to get it's own bail out is ludicrous, even if this happens. The only thing that's going to give main street a break is income. That means jobs, jobs, jobs, jobs, which in turn means dealing with China, the offshore outsourcing of jobs, global labor arbitrage and a host of other policies. Clearly the Obama administration has no intention to do that.

That said, Moody's Zandi calculates $771 billion of negative equity by current homeowners. That doesn't include the people who have already been foreclosed on or lost their homes. That is 19% of all homeowners are underwater. Underwater means they owe way more than the house is worth.

That said, there are about 77 million people in the U.S. who are homeowners. The civilian labor force is 154 million. So in other words, negative equity forgiveness would clearly help the homeowners but that is about half of the people needing income, a job and better wages to even afford a shoe box, never mind a home, in the first place.

Update: Zerohedge has the juice that this is a planted rumor coming from D.C. to make it seem like the administration will actually help people. The FHA did release a new program, loaded with catch-22s like HAMP, so it will be completely ineffective.

Participation in FHA's refinance program is voluntary and requires the consent of all lien holders. To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner's primary residence. And the borrower's existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower's combined loan-to-value ratio to no greater than 115%.

In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent. Interested homeowners should contact their lenders to determine if they are eligible and whether the lender agrees the write down a portion of the unpaid principal.

To facilitate the refinancing of new FHA-insured loans under this program, the U.S. Department of Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishment of the liens. To be eligible, servicers must execute a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.

Interesting catch by ZeroHedge. So, we're filled with rumors that hit the media airwaves, to get a press release implying there is a new program, but buried in the details of that program are so many conditions, it won't do a damn thing at all.

What a media play, and I guess we're suckers for even writing it up.

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Some form of mass debt forgiveness could be a good thing, and could help jump start the economy. However, it would be difficult to implement it equitably.

Of course this is all moot since there is no way this administration will ever do anything that's not in the best interests of the multinational corporations and the banks who want to make sure we live in perpetual indentured servitude.

I normally take Zerohedge with grain of salt

but I think they are right, due to reading the FHA press release that this is a big rumor plant to pre-announce the FHA plan. In other words, they announce "help for the middle class" that isn't any help at all, and now that HAMP has been exposed, we get yet another one.

For myself, the ultimate of using taxpayer dollars to train people in order to offshore outsource U.S. jobs says it all on this administration.

I've been researching this

I've been researching this subject for days and don't like the idea of throwing money to the middle class taxpayer that hasn't been able to keep his house and bills paid for, but that's not what's really concerning me.
What's got me scared to death is WHAT'S GOING TO HAPPEN TO MY REAL ESTATE STOCK. I own alot of Fannie Mae and Freddie Mac. I can't find any predictions on what's going to happen.

are you kidding?

A. Why do you have it in the first place now?

B. Do you think that screwing over homeowners, having more foreclosures is really a good idea for the national economy?

C. I have no idea. Congress won't touch either of them to date and odds on because China owns $300 billion in various Fannie Mae/Freddie Mac stocks, bonds.

So of course the United States won't do anything that upsets China.

But god, where's your sense of loyalty? Sell the damn stuff and go out, create a new business and hire some Americans.