House Dems & White House Press FHFA Regarding Principal Reductions

Source: The Hill

The Obama administration signaled that it is stepping up pressure on Fannie Mae and Freddie Mac to provide mortgage-principal reductions for holders of government-backed loans. Housing Secretary Shaun Donovan said that the administration is considering taking “additional steps to make mortgage principal reductions available to Fannie and Freddie homeowners,” that go beyond recently announced incentives designed to spur a write-down of those home loans to bolster the housing market and economic recovery. I hope Fannie and Freddie accept the incentives and I hope they will do principal reductions,” Donovan said at a press conference announcing a $25 billion settlement between states and five of the nation’s largest banks over foreclosure abuses. “Fannie and Freddie are doing extensive payment modifications for homeowners but not, to date, doing significant principal reductions,” he said. “We need to break the logjam of principal reductions.”

To that end, House Democrats have been pressing Edward DeMarco, acting director of the independent Federal Housing Finance Agency (FHFA) that oversees Fannie and Freddie, to provide documents to support his opposition to reducing principal for homeowners who are underwater on their loans but current on their payments. DeMarco has argued before Congress that principal reductions are “not going to be the least-cost approach for the taxpayer.” Under a plan announced in January by President Obama, Treasury would offer triple incentives designed to spur principal reductions to underwater homeowners through the Home Affordable Modification Program (HAMP), a plan the FHFA is currently evaluating, Donovan said. “Although more funds from Treasury could help incentivize principal reduction programs even further, Mr. DeMarco’s own data show that he should start implementing these programs now, both to comply with the law Congress passed and to start saving American taxpayers billions of dollars,” House Oversight and Government Reform ranking member Elijah Cummings (D-Md.) told The Hill.

Principal reduction has been available through HAMP but it has not been widely used.  

The settlement announced this week between states and banks doesn’t cover the government-sponsored enterprises (GSEs) so the agreement alone can’t compel Fannie and Freddie to move forward with principal reductions, Donovan said. 

So far, DeMarco has shown no signs of wavering on his stance that reducing mortgage principal will cost taxpayers more than forbearance efforts, leading Democrats to call for him to step down while, at the same time, urging the White House to appoint a director who would be more agreeable to their policy ideas. 

In a statement following the unveiling of the January proposal asking FHFA to consider the incentives program, DeMarco said “that FHFA recently released analysis concluding that principal forgiveness did not provide benefits that were greater than principal forbearance as a loss mitigation tool.”

But Cummings and fellow panel member Rep. John Tierney (D-Mass.) say that FHFA’s own reports prove that reducing mortgage principal would actually save taxpayer money, contrary to DeMarco’s arguments. 

The lawmakers wrote DeMarco a letter last week criticizing him for highlighting a $100 billion cost for providing principal reductions for 3 million homeowners who are underwater on their mortgages instead of pointing out an estimated savings of $28 billion for reducing principal for a portion of those loans, a more likely scenario. 

“We understand that the FHFA is not part of the Obama administration, and that you do not take direction from administration officials, but it appears that your refusal to follow Congress’ direction and allow principal reduction programs is based more on ideology and the fear of political backlash than on a straightforward analysis of the interests of American taxpayers,” they wrote. 

A Treasury Department official, in an email to The Hill, said $100 billion is the total cost of writing down all underwater debt for government-backed mortgages, while the principal forgiveness program FHFA is considering has a $20 billion benefit to taxpayers because it reduces defaults. 

Mark Zandi, chief economist at Moody’s Analytics, has said that write-downs under HAMP could help homeowners who are struggling with their loans and it would be up to the FHFA to properly implement the policy. 

Cummings and Tierney also said a former Fannie Mae employee has provided new information about a pilot program for principal reductions tentatively approved in 2010 but canceled by Fannie Mae officials because they were “philosophically opposed” to the concept of reducing principal, despite potential economic benefits

Meanwhile, Donovan continued his insistence that reducing mortgage principal will help the sector and the broader economy recover faster. 

“Principal reduction is an important part of steps that we need to take that will help the housing market recover,” he said. 

“It’s critical for all of us to be able to get the housing market accelerating in its recovery.” 

In a Friday speech, Fed Chairman Ben Bernanke said “no single solution will be sufficient but sustained efforts to address the many interlocking factors holding back the housing market will pay dividends in the long run.”

What is certain is that the pressure for a broader principal reduction plan through the GSEs is growing.  

Iowa’s Attorney General Tom Miller said he expects the states’ settlement with the banks “will make widespread principal reduction throughout the country, commonplace.” 

Under the agreement, Miller said there will be a significant amount of principal reduction “done right away” and it will feed from a very large pool of homeowners. 

“Once this demonstration of principal reduction takes place it will work and it will become commonplace,” he said. 

“As far as homeowners who want principal reduction, this is the vehicle.”

The Federal Reserve also has suggested that the FHFA move forward with reducing principal to reduce the number of delinquencies, which they acknowledged may increase short-term losses but have long-term benefits for the housing market. 

The Fed’s white paper sent to Congress in January said “some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

Even more broadly, The Leadership Conference on Civil and Human Rights, a coalition of more than 200 groups, sent DeMarco a letter on Friday asking him to do more to reduce foreclosures and stabilize the housing market, including reducing mortgage principal for underwater borrowers. 

“We believe that Fannie Mae and Freddie Mac principal reduction policies must promptly be instituted in order to significantly reduce foreclosures, stabilize the housing finance market, and ultimately reduce taxpayer losses stemming from the takeover of the GSEs,” wrote Wade Henderson, president and chief executive and Nancy Zirkin, executive vice president or the group. 

“We strongly believe that principal reductions are very much in the interests of the taxpayer owners of the GSEs, and we remain troubled by assertions you have made that it is not the FHFA’s responsibility to provide “more general support to the housing market.” 

The group has a meeting with DeMarco on Feb. 23, but they are trying to get that moved up because of recent developments.


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