A proposal to help struggling homeowners by writing off some of
the principal on their underwater mortgages has been rejected by
the head of the agency that oversees
Allowing principal reductions on Fannie Mae and Freddie Mac
mortgages "would not make a meaningful improvement in reducing
foreclosures in a cost effective way for taxpayers," Edward
DeMarco, acting director of the Federal Housing Finance Agency
(FHFA), wrote in a letter explaining his decision.
Writing to the heads of the House banking committee yesterday,
DeMarco emphasized the FHFA's statutory duty to minimize taxpayer
losses and expressed doubts over the proposal's potential
effectiveness. He also expressed concerns that such a policy could
encourage underwater homeowners to deliberately default in hopes of
getting a reduction, which would increase losses that taxpayers
would have to cover.
DeMarco's decision was immediately criticized by Secretary of
the Treasury Timothy Geithner, who called on DeMarco to reconsider
his decision. In his own letter to DeMarco sent yesterday, Geithner
said the FHFA's own analysis showed the proposal could help up to
half a million homeowners and save Fannie Mae and Freddie Mac $3.5
billion compared to existing loan modification programs.
Geithner said the proposal would also help boost the housing
market and save taxpayers up to $1 billion.
By contrast, DeMarco said the maximum savings to taxpayers would
likely be only around $500 million in a best-case scenario, and
that most of the principal reductions would go to homeowners who
had not made a mortgage payment in over a year. He also said a
principal forgiveness program could inhibit mortgage lending by
undermining investor confidence.
Because Fannie Mae and Freddie Mac are currently in
conservatorship under the FHFA, taxpayers are on the hook for any
further losses by the two "government-sponsored enterprises," or
GSEs, as they are known.
The proposal centers on allowing Fannie Mae and Freddie Mac to
grant principal reductions on loan modifications performed under
the Home Affordable Modification Program, or HARP. The option,
known as the Principal Reduction Alternative, is already available
for HAMP loan modifications on non-GSE mortgages, but DeMarco has
blocked its use on mortgages backed by Fannie Mae and Freddie
The Obama administration has been pressing the FHFA to allow
principal reductions on troubled mortgages as a way of stabilizing
the housing market and boosting the economy. However, it has turned
into a political standoff with DeMarco, a Bush administration
holdover who became acting director when the previous director
Obama's own nomination to head the agency, North Caroline
banking regulator Joseph Smith, asked that his name be withdrawn
after the appointment was blocked by Senate Republicans.
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