A plan to cut the amount of principal owed by borrowers with troubled mortgages from Fannie Mae and Freddie Mac has been blocked by the acting head of the Federal Housing Finance Agency. The move has brought strong words from members of Congress and even Treasury Secretary Timothy Geithner.
Earlier in the year, Fannie Mae and Freddie Mac both concluded that writing down the amount owed by troubled borrowers would be mutually beneficial for the borrower and the institution. Back in the spring of 2012, financial executives at Fannie and Freddie made presentation to the FHFA showing that principal reduction would save money in foreclosure costs and allow borrowers to keep their home.
The proposals have been under consideration for months, but acting director of the FHFA, Edward J. DeMarco has said he would not allow such loan forgiveness measures. The move has frustrated the Obama administration which had sought to use the plan to help the economy by reducing foreclosures.
“We concluded that the potential benefit was too small and uncertain relative to the known and unknown costs and risks,” DeMarco told reporters after a months-long agency analysis.
DeMarco noted several potential risks of the plan in his talks with reporters and letters to stakeholders. He argues that reducing the amount owed did not guarantee that people would begin to make their payments again and that an across the board loan forgiveness strategy could encourage borrowers to intentionally default in the hope of getting taxpayer aid.
“A key risk in principal forgiveness targeted at delinquent borrowers is the incentive created for some portion of the current borrower population to cease paying in search of a principal forgiveness modification,” DeMarco said.
The regulator also noted that these loan forgiveness measures would be backed by taxpayer dollars. So even though the measures are beneficial to the mortgage companies and the home owners, they would cost the taxpayers.
“However, nearly all of this benefit is simply a transfer from the taxpayers to the enterprises, which would add to the over $188 billion in taxpayer support the enterprises have already received,” DeMarco wrote in a 15-page report from the FHFA. “Under other reasonable assumptions, implementing (principal forgiveness) would actually increase taxpayer costs.”
This point of view has been contested by other economists. Loan reduction has been shown to work in many cases. Others also argue that since Fannie Mae and Freddie Mac are quasi-government entities, saving Fannie and Freddie money also saves taxpayer money.
Mike Calhoun, head of the nonpartisan Center for Responsible Lending, said, “What makes this especially disappointing is that other lenders are already doing this — it makes good business sense. It saves money for the businesses. In this case it would save money for taxpayers.”
The decision caused a stir among Capitol Hill figures. Some Republicans, like Sen. Bob Corker and Rep. Spencer Bachus praised DeMarco for his fiscal principles. On the other end of the aisle, Democrats like Rep. Elijah Cummings and Rep. Gary Peters gave disapproving remarks.
Treasury Secretary Timothy Geithner wrote a letter to DeMarco urging him reconsider a decision that Geithner described as not “the best decision for the country.”
“Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes, and the legacy of the crisis continues to weigh on the market,” Geithner wrote in the letter. “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis.”
DeMarco’s latest action has added fuel to the fire of those who want President Obama to replace him. In 2010, the president tried unsuccessfully to replace DeMarco with North Carolina banking commissioner Joseph Smith.
Fannie Mae, Freddie Mac Say No to Mortgage Relief
The Director of the FHFA says no to Obama on proposal that Fanny and Freddie forgive portions of mortgage when house is “under water.”