US Government Diving Into ‘Big Data’ For Economic Reports

WASHINGTON (MNI) – U.S. economic data that informs policy, moves markets and helps businesses make decisions has been collected and disseminated much the same way for decades, but as the vast amount of information that is being collected multiplies and data analytics companies grow at a pace that is six times faster than the rest of the economy, the government is looking to catch up.

“I think 10 years from now it is going to be really different,” Mark Doms, Commerce Department Under Secretary for Economic Affairs told MNI about the way government data is collected and used and how it will get better. He spoke following a Capitol Hill briefing on ways to leverage government statistics for data-driven innovation.

The Bureau of Economic Analysis will release the third estimate of second quarter GDP growth on September 26, but the data contained in the report will be three months old by then.

Doms said it is time to explore ways to provide fresher and more frequent snapshots of the economy that would be of more use for businesses and policy makers.

As an example, Federal Reserve Chair Janet Yellen reiterated on Wednesday the Federal Reserve’s “data dependent” policy stance, but the data Fed economists are looking at is often at least a month old.

“When it comes to the economy – what is going on with the economy now and what we currently do is – we send out surveys, we get survey responses and we publish the data with a lag, and that is just not a sustainable model,” Doms said during the briefing.

Doms also said that the integrity of some of the government data is waning.

“A challenge we face is declining response rates in some of our surveys,” Doms said. “Companies and individuals don’t like to report as much as they used to and it affects the quality of our data – that is why we have bigger revisions.”

President Obama has also been a proponent of opening up government data for public consumption and has launched a “Big Data” initiative.

“The administration is empowering the public – through greater openness and new technologies – to influence the decisions that affect their lives,” the White House Open Government Initiative says on its Web site.

The data briefing on Capitol Hill was sponsored by Senator Mark Warner and Doms was flanked by data experts from IBM, Zillow, the City of Chicago and the Center for Data Innovation – a think tank that advocates for data analytics.

The City of Chicago has been a leader in experimenting with real-time data analytics, including putting sensors around the downtown area that are constantly measuring weather and air conditions.

Chicago Data Chief Tom Schenk said during the briefing that the city is partnering with private companies to leverage the city’s data and use it to generate jobs.

Schenk said the city is currently working on a project to build a Google-like interface to “all of the city’s metadata.”

Doms said while “Big Data” analytics for many of the government’s most coveted data reports, like the monthly retail sales report, are still years away, he can envision a world where the government teams up with credit card companies or taps into scanners to create much more timely, frequent and accurate sales data reports.

US SEC Approves Money Market Fund Reforms By Narrow 3-2 Vote

 

By Ian McKendry

WASHINGTON (MNI) – The Securities and Exchange Commission approved money market fund reforms on Wednesday by a 3-2 vote aimed at preventing investor runs and avoiding a repeat of the Reserve Primary Fund meltdown in 2008 that forced the federal government to step in and provide a taxpayer backstop for the industry.

“Today’s reforms will fundamentally change the way that most money market funds operate,” SEC Chair Mary Jo White said in an opening statement, adding that the reforms “will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system in a crisis.”

The approved rules will require certain funds to report a fluctuating daily share price based on the market value of their investments and allow fund directors to impose a liquidity fee and, or temporarily halt investor redemptions during times of financial stress.

The floating share price would apply to institutional prime money market funds which make up more than 30% of the $2.5 trillion market while the fees and gates would apply to nearly all money market funds with the exception of funds that are mostly invested in government securities.

Historically money market funds have maintained a net asset value of $1 and the concept behind allowing a share price to fluctuate is that investors won’t rush to make redemptions for fear of a fund “breaking the buck.”

The new reforms would also deter redemptions during times of stress by requiring money market funds to charge a 1% fee on all redemptions if the funds ratio of cash and most liquid government securities fell below 10% of total assets and a 2% fee if the ratio of liquid assets fell below 30%. However, the rule provides an out for the board if they determine that the fee is not in the best interest of the fund.

The rules also provide for a “gate” which would allow directors to halt redemptions for 10 days if the ratio of liquid assets fell below 30% – but again the directors of the fund have discretion whether to impose the gate or not.

SEC Commissioner Kara Stein, who voted against the reforms Wednesday, said that she opposed the use of gates which she said could incentivize investors to request redemptions in anticipation of losing access to their capital and could “incite a system wide run” on money market funds if one fund were to impose the 10-day redemption freeze.

Stein also warned that a fund that imposes a gate is likely to stop reinvesting during the gated period and instead buy liquid U.S. securities which could be the identical reaction by investors who might redeem money at other funds in exchange for safer investments.

“I fear these incentives may result in a greater chance of fire sales in times of stress and a spread of panic to other parts of our financial system while also denying both investors issuers access to capital,” Stein said.

However, Stein said she favored a floating NAV saying that, “It helps investors understand and experience that these funds are not risk free,” and perhaps nudges investors with lower risk tolerances into less risky assets.

The other commissioner who voted against the money market fund reforms, Michael Piwowar, said he opposed the floating NAV rule for institutional prime money market funds because it “does not preserve the benefits of money market funds” and added that the rule should be studied further before being implemented.

In a statement following the SEC vote, the U.S. Chamber of Commerce issued a statement similar to Piwowar’s saying that, “A floating NAV does not address run risk and would severely if not irreparably harm the viability of the product, taking away a key cash management product and a primary source of funding for the commercial paper market.”

As part of the reforms that were approved on Wednesday, the U.S. Treasury and IRS issued tax guidance to simplify the tax accounting for gains and losses.

The Financial Stability Oversight Council, made up of nine different regulatory bodies including the SEC, called the new SEC rules “significant structural reforms” and added that, “The Council looks forward to more fully examining the SEC’s rule and its potential impact on MMFs and financial stability.”

US HUD’S DONOVAN: CFPB QM RULE SHLD NOT BE OVERLY RESTRICTIVE

 

By Ian McKendry

WASHINGTON (MNI) – U.S. Housing and Urban Development Secretary Shaun Donovan Thursday said as the Consumer Financial Protection Bureau drafts its final rule on what will be considered a “Qualified Mortgage,” it should take into account the kind of loans that contributed to the housing crisis rather than how many loans will be eligible.

“You can’t just look at standards today and say, oh it’s too wide a box because 95% of mortgages would qualify, you have to look at the kinds of mortgages that were being made in the crisis and those are the kinds of loans you want to avoid,” Donovan told MNI on the sidelines of a Mortgage Bankers Association conference.

Donovan said some have advocated for the “widest box” possible while others have argued that it does not make sense to have a qualified mortgage if everyone qualifies.

But Donovan pointed out that lending standards today are much stricter than they were in the run-up to the crisis and while loans being made today are safer, credit standards are likely to ease as the economy improves.

“You can’t just think about the loans that are being made today, you have to think about the loans that were being made 5 years ago,” Donovan said when considering what kind of loans to exclude from QM.

The CFPB took over the responsibility for crafting the QM rule from the Federal Reserve as part of the Dodd-Frank Act and is expected to issue a rule this year.

Under QM, lenders will be relieved of some liabilities by making loans that meet specified criteria.

In a briefing book issued at the conference, the MBA said that “in light of liability considerations, it is anticipated that virtually all mortgages made will be QMs; those that are not, if available at all, will be costlier and not required to offer borrowers QM protections.”

The MBA also joined a wide range of housing advocates and trade associations last Thursday in writing a letter to CFPB Director Richard Cordray urging that QM be “broadly-defined” and “ensure that the largest number of credit worthy borrowers are able to access safe, quality loan products for all housing types.”

QM will also likely set a precedent for Qualified Residential Mortgages — which will exempt mortgage underwriters from retaining some of the risk of the loans that are packaged into mortgage-backed securities.

Speaking to mortgage bankers during the MBA conference, Donovan said “we have to make sure that as much as possible given the range of different regulatory actions and agencies that we are speaking as much as possible with one voice on this issue.”

“One of my biggest concerns is that we had a QM and a QRM that were not necessarily moving together and one of the things we have done over the last few months is we have made a decision on QRM, that we are clearly going to combine it in timing with QM,” Donovan said.

“We are hearing more and more of the arguments of having a single standard that would apply across QM and QRM as much as possible,” he continued, adding “that has been gaining some real traction.”

Donovan also said he is concerned with “overcorrecting” in a time when credit is already tough.

“I am very concerned that some of the proposals that have been out there would go too far in restricting credit going forward,” Donovan said.

US Housing Watch: Economists Concede More Moderate Trajectory

 

By Ian McKendry

WASHINGTON (MNI) – The U.S. housing market appears to be stuck in low-gear as a hoped-for bounce in the second quarter is yet to be seen and some economists are now conceding that the more modest trajectory will continue throughout the year.

“We originally expected this to be the breakout year that would show that the housing recovery was on track … However with the slower start to the year we have seen a lot of numbers scaled back,” Wells Fargo Senior Economist Anika Khan told MNI. “I think the overall story is still mixed and we are looking for an overall improvement” Khan said.

Khan said a moderation in home price gains was expected after a seeing double digit gains in 2013, but that applications to purchase homes has been sluggish.

Data from the Mortgage Bankers Association show that mortgage originations totaled $226 billion in the first quarter of 2014 which compares to $524 billion the first quarter of 2013 and they are forecasting a total of $1.014 trillion for all of 2014 which is $741 billion less than last year. The Case-Shiller Home Price Index report that was released on Tuesday also is starting to point to a possible slowdown as prices fell 0.3% on a seasonally adjusted basis in May.

“The acceleration out of the recession – the demand for housing that we saw has essentially ended,” ITG Chief Economist Steve Blitz said in an interview.

“The housing market that we have is okay to the extent that it reflects the economy we have … I think housing is going to follow the economy and not lead it,” Blitz said.

The latest report from the Bureau of Economic Analysis advance GDP estimate showed that the U.S. economy expanded 4.0% in the second quarter after contracting 2.1% in the first quarter and many economists are now hoping for 3.0% growth in 2014.

However, housing numbers are still ho-hum. The pace of new home sales averaged 419,000 between April and June after averaging 431,000 in the first three months of the year and 446,000 in the final three months of 2013. The National Association of Realtors said sales of existing home rose 2.6% in June to a 5.04 million sales pace but were down 6.3% from a year ago and NAR Chief Economist Lawrence Yun has said that inventory continues to be a constraint.

“New home construction needs to rise by at least 50% for a complete return to a balanced market because supply shortages – particularly in the West – are still putting upward pressure on prices,” Yun said during a press conference earlier in the month.

While the kind of growth that is needed to give the economy a jolt is yet to be seen, the decay left by the housing crash is clearing.

Numbers from RealtyTrac which tracks mortgage foreclosures along with other housing data showed that were a little over 100,000 foreclosures in June which is the fewest since July 2006 and is a milestone because August 2006 is often considered the precipice of the housing crash.

RealtyTrac Vice President Daren Blomquist said he believes foreclosure activity will begin to normalize in the first quarter of 2015 – which would be about 90,000 foreclosures per month.

“We have all along have been expecting 2014 was going to be a reality check,” Blomquist told MNI adding that “the market is finding a more normalized and sustainable rhythm” and he expects year-over-year home price appreciation will be in the single digits year-over-year in 2014 after reaching double digits in 2013.

Economists and analysts also continue to point to structural and demographic changes. Banks which have been slapped by lawsuits worth billions of dollars by regulators are wary to lend and Millennials who represent typical first-time home buyers are failing to start new households.

The NAR said first-time home buyers represented only 28% of existing home sales in June which is well below the 40% historical norm.

A Fannie Mae survey found that the percent of young adults between 18 and 34 living with their parents increased from 27% between 1990 to 2006 to 31% in 2013 and that school expenses or not making enough money were the most common reason given.

The New York Federal Reserve estimates that there is between $900 billion and $1 trillion in student debt outstanding.

The Federal Housing Administration has also made the cost of low down payment loans more expensive by raising the price of insurance. The cost has gotten high enough that some borrowers that would normally borrow from the FHA are borrowing from the Fannie Mae and Freddie Mac instead with the help of private mortgage insurance – however that too may become more expensive as the Federal Housing Finance Agency is set to tighten mortgage insurer standards which will probably push borrowers on the fringe between conventional loans and FHA back into FHA.

Yale Professor and housing expert Robert Shiller said during a CNBC interview after the release of the Case-Shiller Home Price Index that the tiny price decrease seen in June “could be a turning point” and that there is evidence that the housing market is weakening.

“This might be a little downward blip and it might continue going up, but I cant think it will go up much more – maybe 10% before a correction,” Shiller said.

–MNI Washington Bureau; tel: +1 202-371-2121; e

Rising Fannie Mae Stock Could Be Signaling Doubt On GSE Reform

WASHINGTON (MNI) – Fannie Mae and Freddie Mac stock has recently seen a resurgence after being long thought dead, but as Congress has failed to seriously take on housing finance reform, the market may be signaling that they don’t think the GSEs are going anywhere.

Shares of the two mortgage giants shot up on March 13, after being dormant for years, as Fannie Mae said it was delaying its annual 10-K filing because it needed more time to value tax deferred assets but said that “regardless of the decision to release or not release the valuation allowance, we expect to report significant net income for the three months and the year ended December 31, 2012.”

There is no question that the housing market is on the mend, and it now appears Fannie and Freddie are once again making money. While the two mortgage giants still owe the U.S. Treasury nearly $200 billion for funds that were provided as part of the tax payer bailout the revenue stream they are generating could be a tempting “piggy bank” for a cash strapped federal government.

The temptation is strong enough that four senators proposed legislation the day after Fannie Mae’s statement that would prohibit increases in agency guarantee fees to offset government spending. The senators said that if the money being generated by the increase in fees were to be allocated to fund other spending it would be nearly impossible to reform Fannie and Freddie.

While it seems unlikely that shareholders of Fannie Mae and Freddie Mac stock will ever see a dime because the U.S. Treasury owns Senior Preferred Shares which it acquired as part of the tax payer bailout and the two companies are still in conservatorship, if the enterprises continue to generate income (Freddie Mac reported $11.0 billion in net income in 2012 and Fannie Mae promises “significant net income”) and Congress fails to ever dissolve the mortgage giants, it is not inconceivable that the preferred and common shares owned by the general public could one day be worth something.

Until Congress figures comes up with a solution or housing finance alternative to Fannie Mae and Freddie Mac it remains uncertain what will become of the two companies or if they will ever actually be dissolved. At this point, the idea garnering the most attention is a government entity that acts as a catastrophic insurer.

Meanwhile, the Federal Housing Finance Agency, which acts as the conservator of Fannie and Freddie, is combining their securitization platform into a separate entity that will be completely independent. Would common share holders of Fannie and Freddie have a claim to either of those?

The question remains unknown, and the longer it takes for a real solution the more doubt that there will ever be reform. The recent uptick in Fannie and Freddie shares could be a bet on a cheap stock that could pay off later but it could also viewed as a bet against Congress ever coming up with a solution.

S&P’s Bovino: Fed Likely to Stay Focused On US Econ, Watch EM

 

01:54 EST / Jan 30

By Ian McKendry

WASHINGTON (MNI) – With the anticipation of tighter U.S. monetary policy, slower growth in China and a sell-off in emerging market currencies, worries of economic destabilization and possible spill-over effects had many wondering if the Fed might slow its “measured reduction” in asset purchases, but on Wednesday, the Fed stayed the course and S&P’s U.S. Chief Economist Beth Ann Bovino believes the Fed’s focus will continue to be on the domestic economy.

“I am sure they are concerned about it,” Bovino told MNI following a press conference at the Bipartisan Policy Center. “I didn’t think the sell-off in emerging markets was going to impact their decision unless it spills over, which it hasn’t,” she added.

Bovino said “the factor is going to be what goes on with jobs and price stability,” and that she believes the Fed will continue its measured pace of reducing asset purchases by $10 billion at the next couple of FOMC meetings and if the economy gets a little stronger, “they may up it.”

Data from the U.S. Department of Commerce earlier Thursday showed that the U.S. economy grew 3.2% in the fourth quarter, which was slightly slower than the third quarter pace of 4.1%, but the Commerce Department noted that the U.S. government shutdown impaired economic growth, estimating that hours lost by Federal employees alone shaved 0.3 percentage points from the fourth quarter GDP figure.

Bovino said she is estimating U.S. GDP will increase 2.8% in 2014, which is about on par with the median survey estimate from the December Philadelphia Federal Reserve Livingston survey which surveyed 33 economists and the lower-end of the latest FOMC economic projections. She said however, that she made her forecast before the Senate came up with a budget agreement and that growth could be stronger given that another budget showdown is unlikely.

“The shock from Capitol Hill seems to have lessened,” Bovino also told MNI, adding that “it looks like a shutdown this year is not in the cards, that risk is gone.”

Bovino said another positive, is that the private sector was “surprisingly resilient” in 2013 and that the government is not going to be as much of a drag in 2014.

US Data Preview: April NFP Especially Difficult To Forecast

01:34 EDT / May 04

By Ian McKendry

WASHINGTON (MNI) – The markets are closely watching Friday’s non-farm payrolls number for April and one of the questions economists are asking themselves is, how big of an impact did the weather have on the first quarter?

“I think the big question really is twofold, one is, to what degree has the weather distorted the numbers the last two months, the other is, are the fundamentals deteriorating,” Stephen Stanley, chief economist at Pierpont Securities told MNI.

After averaging more than 250,000 job gains in January and February, the US economy got a splash of cold water with a disappointing 120,000 job gain in March.

Federal Reserve Chairman Ben Bernanke told reporters during a press conference following the Fed’s April policy statement that weather likely distorted the jobs numbers in the first quarter and it is more likely that jobs are growing at a 150,000 to 200,000 pace.

“The weather has probably affected a number of things, it probably brought forward some of the hiring so that it made January and February artificially strong and March artificially weak,” Bernanke said.

According to the median forecasts of an MNI survey, economists are looking for a 165,000 non-farm payroll gain with 170,000 private payroll jobs added and an unemployment rate of 8.2%.

It is worth noting though, that the median forecast has undershot the actual headline April non-farm payroll number the last four years by an average of 74,000 — although, extended out over twenty years, the average miss is almost zero.

Another factor that could contribute to making the April non-farm payroll report difficult to forecast is seasonal adjustment issues.

This year, there were four weeks in between the March and April survey week, as opposed to previous years when there were five weeks.

In 2011, the BLS non-farm payroll seasonal adjustment accounted for about one million jobs — the last time there were four weeks in between survey weeks was 2007 and the adjustment was closer to 800,000.

RBC Chief Economist Tom Porcelli said the ADP employment report which measures private payroll jobs has also had a difficult time forecasting the April non-farm payroll report.

“We did not adjust our numbers after ADP and we sort of make that a rule because it has a fairly spotty track record in terms of forecasting payrolls,” Porcelli told MNI, adding that ADP has missed the April non-farm payrolls number by about an average of 100,000 jobs.

Porcelli, who is forecasting a 160,000 gain for both non-farm payrolls and private payrolls, said he is expecting gains in manufacturing employment while government remains flat.

“Job losses in the government sector are starting to go away,” Porcelli said.

First Trust Advisors on the other hand does use the ADP report in their forecasting model and revised down their payroll expectation after the report printed a weaker than expected 119,000 job gain Wednesday morning.

“We are probably going to see slightly lower numbers than we expected,” Strider Elass, economic analyst at First Trust Advisors, told MNI.

“We think some of it might be a payback from the warmer weather,” Elass added.

A big factor of course is how the Fed judges the strength of the April report.

“We’ll continue to be watching the labor market, that’s a very important consideration,” Bernanke said during the April press conference, adding that he thinks policy is in the right place for now, but the Fed is prepared to take more action if the economy deteriorates.

Stanley at Pierpont, who is forecasting 190,000 job gains, said he thinks the Fed is likely to stand pat, and not make any additional asset purchases for now.

“I think at this point, the bar has been raised pretty high in terms of what it would take to get another round of QE or an extension of twist or any of those things,” Stanley said.

Mesirow Financial Deputy Chief Economist Adolfo Laurenti expressed similar sentiment in a conversation with MNI.

Laurenti, who is forecasting 120,000 non-farm payroll jobs added in April, said “I think QE3 has always been and will remain on the table — probably not yet as long as we see progress of some form.”

“I think 120,000 would be a disappointment but not enough to trigger action,” added.

However, Laurenti said if the next three of four payroll reports are disappointing and the unemployment rate starts to rise, “we may see additional action” by June or July.

The Employment Situation for April will be released at 8:30 a.m. ET Friday by the Bureau of Labor Statistics.

 

US HUD’S Donovan Looking For Ways To Expand Admin Refi Program

12:27 EST / Feb 12

By Ian McKendry

WASHINGTON (MNI) – Housing and Urban Development Secretary Shaun Donovan Wednesday called for an expansion of the Home Affordable Refinance Program, a divergence from what had been assumed was the Obama administration’s stance that expanding the program would do more harm than good.

“I think we should continue to look at everything we are doing in marketing it without legislation, but I think this is something we ought to continue to look at on a legislative front,” Donovan said referencing the HARP program at a press conference sponsored by Politico.

The HARP program allows borrowers with an outstanding mortgage guaranteed by Fannie Mae and Freddie Mac, that is 80% or more than the value of their home – but are current on their mortgage payments – to refinance as long as the loan was made before May 31, 2009.

It was once thought that an extension of the date beyond the May 31, 2009 cut-off was an odds-on favorite after Mel Watt, who’s track record suggests he may have more affordable housing goals than his predecessor, was confirmed as the Director of the Federal Housing Finance Agency.

However, during a speech to an industry group in January, Counselor to the Treasury Secretary for Housing Finance Michael Stegman said that “Treasury believes there should be no change in the HARP eligibility date,” and that “very few homeowners whose loans were originated after the cut-off date are underwater and advancing the date would do more harm than good by prolonging market and investor uncertainties.”

Those comments caught the mortgage-backed securities market by surprise and caused analysts to reverse course, with many seeing an extension of the date as less likely.

“The odds of a HARP date change were around 60%, but have now fallen to roughly 10% or so,” mortgage analysts at JPMorgan wrote in a research note to clients following Stegman’s comments. However, they added that “in a rally, those odds would increase thanks to larger potential borrower savings.”

During the press conference Wednesday, Donovan also referenced the rising interest rate environment, saying “obviously it depends on interest rates and exactly where they go to see if an extension would make sense, but fundamentally I think there is more we can do more on refinancing that would help.”

Donovan added that “this is something that we continue to look at, I think there is legislation that would be helpful on this front, leaving aside the deadline – that Fannie and Freddie can’t do on their own – to broaden eligibility, but this is an area we ought to continue to push on.”

The latest Refinancing Report from the Federal Housing Finance Agency showed that HARP refinancing continued to drop in November – a result of higher interest rates and higher home prices. However, the percentage of HARP refinances relative to total refinances by Fannie Mae and Freddie Mac have continued to hover around 20%.

Washington Gridlock Holding Up Tax Law That Helps Housing Mkt

01:36 EST / Feb 20

By Ian McKendry

WASHINGTON (MNI) – Gridlock in Washington is holding up an extension of a tax law that could benefit more than a million distressed homeowners and is almost universally regarded as a measure that should be extended.

The prospect of full tax reform in 2014 is beginning to look less likely, but a tax extenders package could still get passed. One of the tax bills that is likely to be included in an extenders package is the Mortgage Forgiveness Debt Relief Act – which benefits homeowners that are offered principal reducing mortgage modifications. The law expired in 2013 but if passed, it is likely to be done retroactively. However, the clock is ticking and uncertainty is growing.

“It is caught up in the whole discussion about the extenders that expired,” National Association of Realtors Deputy Chief Lobbyist Jamie Gregory told MNI. “There is a spotlight on it, people know it needs to happen,” Gregory said, but added “people are starting to get nervous.”

“The calls are starting to pick up – so that means its weighing more on more peoples decision making,” Gregory said.

Under federal tax law, if a lender cancels or forgives a debt, the cancelled or forgiven amount becomes taxable income for the borrower. The Mortgage Forgiveness Debt Relief Act of 2007 made a provision that allowed forgiven mortgage debt to be excluded from being taxed as income to encourage mortgage modifications.

Laurie Goodman, director of housing finance policy at the Urban Institute told MNI that the Act plays a key role in principal reduction modifications that are offered to seriously delinquent borrowers, who may choose to “wait it out” and eventually be foreclosed on rather than pay tax on the reduced principal. However, the modification becomes much more attractive to the borrower when the reduction comes without the hefty tax bill.

In a research note, Goodman and co-author Ellen Seidman, a senior fellow at the Urban Institute, estimate that as many 1.4 million seriously delinquent borrowers could benefit from a principal reduction mortgage modification and as many as 2 million borrowers could be affected by the growing uncertainty.

Goodman conducted the analysis before joining the Urban Institute, when she was senior managing director at Amherst Securities. She testified on Capitol Hill in 2012 that the Federal Housing Finance Agency should allow Fannie Mae and Freddie Mac to conduct principal reduction modifications because of its effectiveness.

Edward Demarco, then FHFA Acting Director, opposed principal reduction modifications because of the moral hazard they presented – even though an FHFA analysis indicated that allowing Fannie Mae and Freddie Mac to conduct principal reduction modifications could be beneficial.

In the research note, Goodman and Seidman say “FHFA’s new director, Mel Watt, is likely to revisit this issue,” but that “the expiration of the Mortgage Debt Relief Act pushes priority of the principal forgiveness issue further down the FHFA queue, and when Watt revisits the issue, approval will be less likely.”

The note also warned that not extending the Act contradicts some of the settlements between government regulators, lenders and servicers. The National Mortgage Settlement in 2012 between State Attorneys General, the Department of Justice and the five largest mortgage lenders set aside $10 billion of the $25 billion settlement for principal forgiveness. The $13 billion settlement JPMorgan reached with regulators in 2013 set aside $4 billion for “consumer relief” which includes principal reduction modifications.

“The timing of the expiration of the Mortgage Forgiveness Debt Relief Act is thus particularly unfortunate because it undermines the effectiveness of an increasingly utilized tool to reduce foreclosures,” Goodman and Seidman said.

NAR’s Gregory said his organization remains optimistic that the law will get extended before the end of the tax year, “but we don’t have certainties.” He added that movement on the Senate side seems likely while “the water is a little murkier on the House side.”